Feigenbaum Law

Democratic States Sue Federal Government Over Tax Reforms

Personal Tax Planning
Tax Disputes & Litigation
August 1, 2018

Last month, New York, New Jersey, Maryland, and Connecticut sued the federal government, claiming that the Republican tax reforms brought in under President Trump unfairly single out high-tax Democratic states.

The lawsuit, filed in the Southern District of New York, seeks to block the cap on deductions for state and local taxes and names the Internal Revenue Service and the U.S. Treasury Department as defendants. It seeks a court judgment ruling the tax policy unconstitutional and is also requesting injunctive relief, citing, among other things, the 16th amendment which states that the federal government’s tax power cannot be used to infringe upon the sovereign authority of each state to determine its own fiscal policy.

SALT: The Point of Contention

One of the biggest changes in the Republican tax overhaul was the cap on deductions for state and local taxes (i.e. SALT).

Previously, taxpayers who itemized their taxes were able to deduct their state individual income, sales, and property taxes. The deduction was unlimited. Following the implementation of the Tax Cuts and Jobs Act, deductions were limited at $10,000.

The SALT deduction is generally the main reason taxpayers itemize their taxes. According to the Tax Foundation, more than 95% of itemizers claimed the deduction in 2014, as compared to 28% of all taxpayers. Almost 90% of the SALT benefit goes to taxpayers with income of more than $100,000. High-income and high-tax states (such as the four plaintiff states in the lawsuit) receive most of the value of the deductions.

In 2015, the average SALT deduction for New Yorkers taking advantage of it was $22,000. In New Jersey it was $18,000. As a result of the changes, taxpayers in New York state alone are expected to pay about $14 billion more in 2018 and more than 500,000 taxpayers in Maryland will see their taxes increase.

The Position of the Four Plaintiff States

New York Governor, Andrew Cuomo, who first announced his opposition to the tax reforms in early 2018, called the SALT tax law change “un-American” and “repugnant” and noted that it penalizes Democratic states. Maryland’s attorney general, Brian Frosh, has said that:

Eliminating the SALT deduction will jack up taxes for more than half a million Marylanders…It is an attack on state sovereignty. It will reduce funding for local law enforcement and for construction of infrastructure statewide, and it will cripple our ability to educate our kids.

The Response to the Lawsuit

Critics have dismissed the lawsuit as political gamesmanship that will not survive in court.

The executive vice-president of the Tax Foundation has noted that Congress “can really do what it wants” and that the suit does not have much merit.

Republicans have stated that the plaintiff states should “focus on reducing the cost of state taxes instead of taking on Washington.” New York state Senate Leader John Flanagan noted that “New York cannot sue its way out of high taxes”.

A Treasury Department spokesperson told NBC news that the department is reviewing the complaint.

We will continue to follow developments in this matter and will provide updates as they become available. In the meantime, if you have questions about personal tax planning, contact Feigenbaum Law. Accountants and lawyers in both the US and Canada routinely seek us out for assistance with complicated tax compliance issues. We also have significant experience in the administration and litigation of tax matters in the US and Canada. Reach out to learn more about how we can help or call us at (905) 695-1269 or toll free at (877) 275-4792.

Tagged: personal tax planning, SALT, Tax Cuts and Jobs Act, tax reform