Innovative Strategies For Winning Tax Controversies, Business Structuring And Estate Planning

Hign Tax States Sue Federal Government

by | Jul 18, 2018 | irs, state tax, tax reform

The high tax States, including New Jersey, are suing the Federal Government because of the Tax Reform Act. They are arguing the $10k cap on State and Local Taxes is somehow Unconstitutional. They will lose. There is no right to have a Federal Tax Deduction for local taxes. It would be surprising if the Courts side with the States. Here is a good article on the lawsuit from Thompson-Reuters:

NEW YORK, (Reuters) – Four U.S. states sued the federal government on Tuesday to void the new $10,000 cap on the federal deduction for state and local taxes, included as part of the President Donald Trump’s 2017 tax overhaul.

The lawsuit by New York, Connecticut, Maryland and New Jersey came seven months after Trump signed into law the $1.5 trillion overhaul, which also lowered taxes for many wealthy Americans and slashed the corporate tax rate.
It also adds to the many legal battles between Democratic-led and -leaning states, including several that impose comparatively high taxes, and the Trump administration.
Andrew Cuomo, New York’s Democratic governor, said in a statement: “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”.
The U.S. Department of the Treasury, which along with Treasury Secretary Steven Mnuchin is among the defendants, was not immediately available for comment.
Taxpayers had before this year enjoyed an unlimited federal deduction for state and local taxes, or the SALT deduction.
But under the cap, individuals and married taxpayers filing jointly who itemize deductions may deduct only up to $10,000 annually for state and local income, property and sales taxes.
Critics say the cap disproportionately harms high-tax states, many of which lean Democratic.
Voters in New York, Connecticut, Maryland and New Jersey favored Hillary Clinton, a Democrat, in the 2016 presidential election.
According to the lawsuit, capping the SALT deduction will force New York taxpayers alone to pay an additional $14.3 billion in federal taxes this year, and another $121 billion through 2025, when the cap is scheduled to expire.
The states said the cap will depress home prices, spending, job growth and economic growth, and impede their ability to pay for essential services such as schools, hospitals, police, and road and bridge construction and maintenance.
They also said it “effectively eviscerates” a deduction that has been on the books since 1861, and unconstitutionally intrudes on state sovereignty.
The lawsuit was filed in the U.S. District Court in Manhattan.
In May, the Treasury Department said it would propose regulations aimed at states trying to circumvent the cap.

New York, Connecticut and New Jersey had already adopted measures allowing taxpayers to fund local governments by making deductible charitable contributions to specified funds instead of paying taxes.