Four States Sue D.C. Over Federal Tax Deduction Cap

Connecticut, Maryland, New Jersey, and New York are fighting the $10,000 federal deduction cap instituted under Trump’s $1.5 trillion tax overhaul.

New York Governor Andrew Cuomo said: “The federal government is hell-bent on using New York as a piggy bank to pay for corporate tax cuts and I will not stand for it.” The lawsuit alleges that the new cap on deductions “exert[s] a power akin to undue influence” over state tax laws. With an average deduction of $22,000, New Yorkers will end up paying about $14 billion more in taxes in 2018 alone.

Cuomo’s concerns, and those of the other states, are manifold. First, that the cuts unfairly target “blue” states, and depress real estate prices. Further, they claim that the cap will lower spending, inhibit job creation, stifle economic growth, and make it addressing infrastructure costs significantly more difficult.

Before the overhaul, taxpayers had always been allowed to claim unlimited federal tax deductions. Known as SALT, the previous guidelines have been in place since 1861.

While the Treasury Department said in May that it would be looking for ways to close loopholes, Connecticut, New Jersey, and New York have already adopted workaround measures for their citizens. Taxpayers can voluntarily pay into specific funds in order to support municipal services, then claim the deductible donations.

Indiana University tax law professor David Gamage is skeptical of the lawsuit’s success. “I think it’s very unlikely that it succeeds,” he said. “The Supreme Court has generally given Congress wide latitude in carrying out its taxing power, especially in setting deductions. It would be a pretty dramatic change of direction to allow this lawsuit.”