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Financial Planning > Tax Planning > Tax Deductions

3 Governors Say They Will Sue Feds Over New Tax Law

By Josefa Velasquez

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The governors of New York, New Jersey and Connecticut said Friday they are forming a coalition to sue the federal government over the newly enacted tax overhaul that caps deductibility of state and local taxes.

During a conference call with reporters, New York Gov. Andrew Cuomo repeated his criticism that the federal tax overhaul approved by Congress in December and signed by President Donald Trump is illegal.

“There is a very strong argument that the bill is a fundamental violation of states’ rights and repugnant to the very concept of federalism that formed this nation,” Cuomo said in a conference call with newly installed New Jersey Gov. Phil Murphy and Connecticut Gov. Dannel Malloy. All three are Democrats.

The tax overhaul Trump signed in December caps a deduction for state and local taxes at $10,000—the deduction previously was unlimited—which may increase the federal tax liability for many homeowners in high-tax states such as New York and New Jersey.

Murphy said he expects the lawsuit against the federal government to be filed within weeks. A spokeswoman for Attorney General Eric Schneiderman confirmed that a lawsuit against the federal government has not yet been filed. A decision on the court in which it will be filed hasn’t yet been made, Malloy said.

“We are having some conversations offline with other states and I think we’ll choose the best and appropriate venue when the time comes. It probably will be a venue within our area,” Malloy said, referencing the tri-state area.

Earlier this month, during his annual State of the State address to the Legislature, Cuomo said he planned to sue the federal government over the federal tax law arguing that it violates constitutional principles. Legal experts who specialize in tax law, however, have doubted the likelihood of a success of such a legal challenge, because the 16th Amendment of the U.S. Constitution allows Congress to collect taxes on incomes.

The governor’s top counsel, Alphonso David, told the New York Law Journal earlier this month that the Cuomo administration is considering “a variety of claims” against the federal government over the tax law. Despite the legal hurdles such a lawsuit could face, Cuomo said Friday the federal government is infringing on state’s rights.

“States are not colonies of the federal government. This is purely double taxation. You are getting taxed on the state income tax and your property tax. … Legally we believe there’s a very strong argument that it’s unconstitutional,” Cuomo said on the call. “The federal government is trying to trample state’s rights.’’

Cuomo, an Albany Law School graduate who is said to have presidential ambitions, added that discovery in the upcoming lawsuit will be critical.

“I would caution against making any legal conclusion on legal precedence until you know the facts here. The discovery here is going to be key. This is a bill that was passed in the dead of night. This is a bill that had the least transparency. In discovery, you’re going to see emails between the White House and the Senate, and the White House and the Congress. How did they pick these 12 states? On what basis did they pick these 12 states? Did you really think it was a coincidence … that Trump lost all of these states? Do you really think it’s a coincidence that they are blue states? … All you need is one email that says ‘these are Democratic states and therefore we can get it passed.’ Now you have a targeting for political reasons and now you’re off to the races,” Cuomo said.

During the conference call, David supplemented Cuomo’s remarks noting that courts have “historically rejected government actions that inappropriately targets a class of people.”

“In this case we’re talking about these Democratically governed states—12 states that have unfortunately been targeted. We are exploring a variety of legal claims in response to this divisive federal SALT law. So I would not draw any conclusions about what our causes of action are going to be until our complaint is filed,” Cuomo’s top counsel said in the call.

In an effort to stave off some of the effects of the federal tax overhaul, the Cuomo administration issued preliminary plans for a state payroll tax. Last week New York Department of Tax and Finance issued a report offering a menu of options on ways to overhaul the state’s tax structure.

One of the proposals in the report would keep the state’s current income tax and levy a payroll tax on employers based on each employee’s tax withholdings. The proposal to impose a payroll tax on employers, which is still legally deductible on federal taxes, would be an effort to offset some effects of the federal tax overhaul on New York residents, many of whom stand to lose some of their state and local tax deductions.

Republicans who control the state Senate in New York immediately scoffed at Cuomo’s proposal to implement a payroll tax.

“I don’t like the payroll tax at all. I haven’t met any one of my colleagues who likes this—the payroll tax. People pay enough taxes already,” Senate Majority Leader John Flanagan said earlier this month.

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