Following through on a threat made in January, the states of New York, Connecticut, Maryland, and New Jersey are suing the federal government over the Republican-led tax reform bill, which President Donald Trump signed into law late last year.
At issue is the Tax Cuts and Jobs Act’s elimination of certain state and local tax deductions, often referred to as SALT deductions. The tax bill places a cap of $10,000 on SALT deductions, but several states, including New York, New Jersey, Maryland and Connecticut, have state and local tax burdens that far exceed $10,000.
And according to the Democratic governors and attorneys general of those four states, the Republicans’ tax overhaul is disproportionately harmful to the states’ residents.
The lawsuit pits the states of New York, Connecticut, Maryland, and New Jersey against the Department of the Treasury and Treasury Secretary Steven Mnuchin, the Internal Revenue Service and Acting IRS Commissioner David Kautter, and the United States of America.
Each of the four states’ governors and/or attorneys generals (Maryland Gov. Larry Hogan, a Republican, is not referenced in the state’s press materials about the lawsuit) claim that the SALT deduction reduction will significantly increase the taxes on the states’ residents.
New York claims that the cap will increase New York residents’ federal taxes by $14.3 billion in 2018 alone, plus an additional $121 billion between 2019 and 2025.
“New York will not be bullied. This cap is unconstitutional - going well beyond settled limits on federal power to impose an income tax, while deliberately targeting New York and similar states in an attempt to coerce us into changing our fiscal policies and the vital programs they support,” New York Attorney General Barbara Underwood said.
“We will not allow partisans in Washington to hurt our people or interfere with our policies,” Underwood added. “We’ve filed suit against this unconstitutional attack on New York and our state's fundamental rights -- because we won’t stand by and let Washington pick the pockets of New Yorkers.”
Maryland Attorney General Brian Frosh claims that the tax law will mean that more than 500,000 Maryland residents will lose $6.5 billion in SALT deductions – an average of $11,800 per taxpayer.
“Eliminating the SALT deduction will jack up taxes for more than half a million Marylanders,” Frosh said in a statement. “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.”
Connecticut claims that the cap will cause Connecticut taxpayers to lose an estimated $10.3 billion in SALT deductions this year, and will increase their federal income tax liability by approximately $2.8 billion in 2018.
“President Trump's repugnant tax cuts gave massive handouts to the wealthiest one percent and stuck middle-class taxpayers with the bill,” Connecticut Gov. Dannel Malloy said. “Hundreds of thousands of residents could see a tax increase even as their property values decrease. I am proud to stand with my colleagues across the country in fighting against the discriminatory impacts of this shortsighted and damaging Republican law on our states.”
New Jersey did not provide a specific dollar amount in reference to the impact of the tax bill, but both its governor and attorney general said that the tax law changes are effectively a tax increase on the state’s residents.
“What the Trump Administration enacted with the SALT deduction cap was nothing more than a tax hike on our working and middle-class families and seniors,” New Jersey Gov. Phil Murphy said. “We will continue to fight to protect local taxpayers and businesses and I applaud Attorney General Grewal and the states of New York, Connecticut and Maryland for their leadership and action in challenging the constitutionality of this assault on our states.”
In the lawsuit, the states argue that the cap “effectively eviscerates” SALT deductions and overturns more than 150 years of precedent surrounding states’ rights.
“As the drafters of the Sixteenth Amendment and every subsequent Congress have understood, 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—authority that is guaranteed by the Tenth Amendment and foundational principles of federalism,” the states argue in the lawsuit.
“The new cap disregards Congress’s hitherto unbroken respect for the States’ distinct and inviolable role in our federalist scheme,” the states continue. “And, as many members of Congress transparently admitted, it deliberately seeks to compel certain States to reduce their public spending. This Court should invalidate this unconstitutional assault on the States’ sovereign choices.”
The states claim that the cap on SALT deductions is unconstitutional and want a federal court to overturn it.
“The new cap on the SALT deduction is unprecedented, unlawful, and will cause significant and disproportionate injury to the Plaintiff States and their residents,” the states argue.
The states argue that statements made by certain federal officials, including Mnuchin, categorize the tax bill as a method to force some states to change how they collect and use taxes.
Each of the states included some version of the following statement in their respective press releases:
Policymakers openly talked about coercing states like Maryland to change their policy choices. Treasury Secretary Steve Mnuchin said that the change was intended to “send a message” to states to get them to change their taxation and fiscal policies.
The states also claim that the SALT changes will impact the housing market in each state.
“Homes are the most valuable assets many homeowners possess. With depressed home prices, many homeowners will lose the equity on which they depend to finance retirement, school tuition, and other investments,” the states argue in the lawsuit. “Homeowners will also have less to spend on goods and services, which, in turn, will lead to decreased business sales, lower the Plaintiff States’ revenue, and curtail their economic growth.”
To read the states’ lawsuit in full, click here.