States challenge federal deductions cap on state and local taxes

The Attorneys General in New York, Connecticut, Maryland and New Jersey on Tuesday filed a lawsuit against the Trump administration challenging the constitutionality of the new cap on federal deductions for state and local taxes in the 2017 tax overhaul.

The states are asking the U.S. District Court for the Southern District of New York to invalidate the $10,000 cap on the federal tax deduction for state and local taxes, known as “SALT.”

A “SALT deduction” refers to the federal individual income tax deduction for all or a substantial portion of state and local real and personal property taxes, income taxes and sales taxes.

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The states argued that prior to the 2017 federal tax overhaul, Congress consistently allowed federal taxpayers who itemized their tax deductions to deduct, subject to certain incidental limitations, all of their state and local real and personal property taxes, and either state and local income taxes or sales taxes from their federal income tax returns, which often adds up to more than the $10,000 cap.

“The new cap effectively eviscerates the SALT deduction, overturning more than 150 years of precedent by drastically curtailing the deduction’s scope,” the states said in the complaint.

The states argue in the complaint the new cap is unconstitutional because it goes beyond settled limits on the federal government’s power to impose an income tax and deliberately harms certain states and their residents.

In a video tweeted Tuesday, New York Attorney General Barbara Underwood said New York filed suit to stop Congress from unfairly targeting New York taxpayers by largely eliminating their ability to deduct state and local taxes on their federal income tax returns.

“Last year for the first time Congress drastically limit the deduction imposing an enormous burden on taxpayers in our states through a law that was deliberately aimed at coercing New York and similar states to change their taxation and fiscal policies,” New York Attorney General Barbara Underwood (D) said. 

The right-leaning Tax Foundation was skeptical of state threats in April to file such a suit, claiming it would be unlikely to have success.

The group on Tuesday reissued comments Executive Vice President Joseph Bishop-Henchman previously made in which he said the lawsuit may be more of a political exercise than a legal one.

“The concern that high state taxes might harm the competitiveness or attractiveness of a state like New York or Connecticut is a valid one, but the solution lays with revisiting those state tax rates rather than meritless litigation,” he said.