Four Blue States Take on Tax-Deduction Cap

MANHATTAN (CN) – A coalition of East Coast states led by New York Attorney General Barbara Underwood filed a federal lawsuit Tuesday challenging the constitutionality of a $10,000 cap on state and local tax deductions to shoulder corporate tax cuts under the Trump administration’s new code.

In a file photo, Treasury Secretary Steve Mnuchin listens as President Donald Trump speaks during a meeting on tax policy with business leaders in the Roosevelt Room of the White House on Oct. 31, 2017, in Washington. (AP Photo/Evan Vucci)

Enacted in December 2017, President Donald Trump and Republican leaders promised that the two main goals of their Tax Cuts and Jobs Act were to trim the corporate tax rate and benefit middle-class families, but those cuts disproportionately come at the expense of tax breaks that are important to residents of high-tax states, which tend to be Democratic.

New York was joined in a 52-page complaint brought Tuesday morning in Manhattan federal court by fellow Atlantic Coast blue states Connecticut, Maryland and New Jersey, seeking declaratory and injunctive relief to block enforcement of the $10,000 cap on the federal tax deductions for state and local taxes, referred to as SALT.

Filed by New York Assistant Solicitor General Caroline Olsen, the complaint names as defendants U.S. Treasury Secretary Steven Mnuchin and David J. Kautter, acting commissioner of the IRS, along with the Treasury Department and the United States of America.

The four states allege that the repeal of the SALT deduction, save for the $10,000 cap for property tax deductions, woven into the Trump administration’s 2017 tax code overhaul will “cause significant and disproportionate injury to” the residents of high-tax, blue states.

“The federal government is hellbent on using New York as a piggy bank to pay for corporate tax cuts and I will not stand for it,” New York Governor Andrew Cuomo said in a statement announcing the lawsuit. “Today I’m proud to announce that New York is the first state in the nation to take legal action against Trump’s tax plan that benefits the 1 percent at the expense of middle-class families. “

Cuomo pledged to “fight back at every turn against President Trump and the federal government’s partisan assault on to protect the people of New York.”

The limited SALT deduction was dubbed “death to Democrats” by conservative economist Stephen Moore, who advised Trump’s campaign on tax policy. Cuomo has called it “political retaliation through the tax code.”

In November 2017, Mnuchin, a former Goldman Sachs partner, said during a speech at the Economic Club of New York, “I do hope that this sends a message to the state governments that, perhaps, they should try to get their budgets in line…and the question is: why do you need 13 or 14 percent state taxes?”

According to the complaint, Trump reiterated that the new cap on SALT deductions was intended to Democratic-leaning states to change their policies or they were “not going to benefit” from the new tax law.

According to analysis by the New York State Department of Taxation and Finance included in the complaint, the $10,000 cap on SALT deductions will increase New Yorkers’ federal taxes by $14.3 billion in 2018 alone, and by an additional $121 billion between 2019 and 2025, but they will receive a disproportionately small share of the tax cuts relative to the amount of taxes they were paying to the federal government before the 2017 law.

Under previous law, homeowners could deduct the full cost of property taxes on their federal income taxes. The $10,000 cap on SALT deductions increases the cost of owning a home, the lawsuit argues, which leads to depressed home values and lost equity for other investments.

New York lawmakers have proposed work-around arrangements that would allow taxpayers to make charitable donations to state funds, offsetting the cap on SALT deductions.

The Treasury Department representative declined to comment on the lawsuit.

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