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States Appeal Judge’s Decision to Toss Local Tax Deductions Lawsuit

December 3, 2019 by Tom Ramstack
The Treasury Department. (Photo by Dan McCue)

WASHINGTON – Four states are appealing a federal judge’s September dismissal of their lawsuit challenging federal authority to limit state and local tax deductions.

In a filing before the 2nd U.S. Circuit Court of Appeals, attorneys for the states argue the cap unconstitutionally interferes with their clients’ 10th Amendment rights.

The underlying lawsuit also accuses congressional Republicans of deceit by trying to use the limit on deductions to raise property taxes in high-income predominantly Democratic states.

New York, New Jersey, Connecticut and Maryland originally sued the Treasury Department, Treasury Secretary Steven Mnuchin and the IRS, among others, in July 2018.

They alleged that the new limit on the so-called SALT deduction, part of the Tax Cuts and Jobs Act of 2017, was “an unconstitutional assault on states’ sovereign choices.”

But U.S. District Judge J. Paul Oetken dismissed the suit on Sept. 30, finding the plaintiffs ultimately failed to show that the SALT cap was unconstitutionally coercive or that it imposed on their own sovereign rights.

SALT in this case stands for “State and Local Taxes.”

He went on to note that the federal government has “exhaustive” authority to impose and collect income taxes.

Previously, there was no limit on the state and local tax deductions.

Lawmakers in high-tax states have tried repeatedly to overturn the SALT deductions. The cap was one of the most politically divisive parts of the Trump administration’s tax overhaul.

The judge said states have discretion to enact their own tax policies. “But the bare fact that an otherwise valid federal law necessarily affects the decisional landscape within which states must choose how to exercise their own sovereign authority hardly renders the law an unconstitutional infringement of state power,” Oetken’s ruling said.

As an apparent response to the ruling, Maryland Gov. Larry Hogan and some state General Assembly lawmakers pledged to introduce legislation that would allow residents to claim deductions at a higher rate.

A Maryland Comptroller’s Office analysis showed about 28 percent of the state’s residents would pay more in state and local taxes because of the federal law.

New York Gov. Andrew Cuomo called the Democrat-led uproar over the federal cap “economic civil war.”

New York Attorney General Letitia James said the cap “is expected to cost New York’s taxpayers over $100 billion, which is why we will fight this senseless and unconstitutional law.”

She said the $10,000 cap might make some of the 1 percent of state taxpayers who pay 46 percent of the state’s income taxes move to states where they face lower taxes.

Connecticut Attorney General William Tong called the SALT cap “an abusive and discriminatory tax hike on Connecticut.”

“This disappointing decision makes it harder for our state to protect its taxpayers from the disproportionately harmful effects of Trump’s tax law,” Tong said in a statement.The case is State of New York v. Mnuchin, 18-cv-6427, U.S. District Court, Southern District of New York.

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