MANHATTAN (CN) – Three states that hoped expanded credits would curb the effects of 2017 Republican tax bill faced a new obstacle last month when the IRS changed the rules on charitable deductions. They urged a federal judge Wednesday to set that change aside.
Announcing the lawsuit Wednesday, New York Governor Andrew Cuomo called the Trump administration’s so-called SALT cap “unprecedented, unlawful and politically motivated.”
“The final IRS rule flies in the face of a century of federal tax law that says state choices to provide tax incentives for charitable donations do not affect the federal deductibility of those gifts,” Cuomo said in a statement. “Our message to Mr. Trump and the IRS is simple: we look forward to seeing you in court.”
New York Attorney General Letitia James echoed Cuomo’s remarks.
“We will not stand idly by as this administration throws out decades of historic precedent putting our local economies, education systems, and other critical public programs at risk,” James said in a statement.
New York is joined in the suit by Connecticut and New Jersey, a state where residents already pay more to the federal government than they get in return, New Jersey Attorney General Grewal noted.
New Jersey Governor Phil Murphy said many other states are in the same boat: “financial collateral damage to the Trump administration’s rank politicization of the tax code,” said
Connecticut Governor Ned Lamont condemned what he described as “purely partisan” tactics.
“The federal tax reforms approved by Congress were promoted as a tax cut, but in reality they’ve resulted in a tax hike for millions of citizens, including thousands here in Connecticut,” the governor added.
Representatives for the Department of Treasury did not immediately respond to request for comment.
The complaint says most states amended their tax laws following passage by Congress of a $10,000 cap on SALT deductions, short for state and local tax.
“Proponents of the cap were clear about their objectives,” the complaint states. “According to Secretary Mnuchin, the cap would ‘send a message’ to states with generous social welfare programs that their tax and spending policies would need to conform to those of the administration and the Republican Congress.”
Though nothing in the law required taxpayers to account for their state tax benefits by reducing their charitable deductions, the complaint says the IRS worked to achieve that very result the following year, publishing the change as a final rule on June 13.
Challenging the rule under the Administrative Procedure act, the states emphasize that “it treats the receipt of SALT credits as a quid pro quo that diminishes the value of a federal charitable deduction.”
“Had Congress wished to upend more than a century of precedent, it would have done so in clear terms (just as Congress did in making clear in the 2017 law that other benefits—e.g., athletic event seating rights—do negate a donor’s charitable intent),” the complaint says “Congress has not done so, and the IRS cannot be permitted to arrogate Congressional power.”
Wednesday’s suit comes a year to the day that former New York Attorney General Barbara Underwood led a multistate challenge to the SALT cap.