States sue over state and local tax deduction cap

By Alistair M. Nevius, J.D.

The states of New York, Connecticut, Maryland, and New Jersey have sued the U.S. government in federal court, seeking declaratory and injunctive relief to invalidate the $10,000 limit on state and local tax deductions that was enacted as part of P.L. 115-97, known as the Tax Cuts and Jobs Act (TCJA) (New York v. Mnuchin, No. 18-cv-6427 (S.D.N.Y. 7/17/18) (complaint for declaratory and injunctive relief)).

Under the TCJA, individuals are allowed to deduct up to $10,000 ($5,000 for married taxpayers filing separately) in state and local income or property taxes. The states' complaint argues that this "new cap effectively eviscerates the SALT [state and local tax] deduction," (complaint, p. 1), noting that "Congress has included a deduction for all or a significant portion of state and local taxes in every tax statute since the enactment of the first federal income tax in 1861" (id.).

The states argue that "the SALT deduction is essential to prevent the federal tax power from interfering with the States' sovereign authority to make their own choices about whether and how much to invest in their own residents, businesses, infrastructure, and more" (id. at 2) and that the restriction on deductibility of state taxes violates the Tenth Amendment and "foundational principles of federalism" because it "deliberately seeks to compel certain States to reduce their public spending" (id.).

The states also argue that the cap on the deduction "cannot be reconciled with the limits on the federal government's tax powers under Article I, Section 8[,] and the Sixteenth Amendment" (id. at 4).

The complaint alleges that residents of the plaintiff states will see a significant increase in their federal taxes as a result of the cap but will "receive the least benefit from" the TCJA, and that the cap will cause "significant and irreparable direct harm" to the states and their residents (id. at 5). These harms include depressed home values and reduced state revenues (id. at 6).

The complaint asks the court to declare the cap on the state and local tax deduction unconstitutional and to issue an injunction barring its enforcement.

For more on state reactions to the cap, see Barter, "The Tax Cuts and Jobs Act: State Tax Considerations, Impacts, and Responses."

Alistair M. Nevius (Alistair.Nevius@aicpa-cima.com) is the JofA's editor-in-chief, tax.

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