New York, Connecticut, Maryland and New Jersey filed a lawsuit Tuesday claiming last year’s tax overhaul violated the constitution by unfairly targeting Democratic states.
The law puts a new cap on how much Americans are allowed to deduct for state and local taxes, or SALT, from their federal bill. Once unlimited, the deduction is now capped at $10,000. Deductions help reduce a person’s overall tax bill.
The cap will disproportionately harm high-tax states and their residents, the lawsuit says. It also claims the change in SALT interferes with states’ rights to make their own financial decisions.
New York has said the cap will increase New Yorkers’ federal taxes by $14.3 billion in 2018.
“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,” said State Attorney General Barbara Underwood in a statement.
The Treasury Department said it’s reviewing the complaint, and the IRS declined comment due to pending litigation. The complaint was filed in the US District Court for the Southern District of New York.
Joe Bishop-Henchman, executive vice president at the Tax Foundation, believes it’s unlikely the lawsuit will be successful.
“The SALT cap does have a disproportionate effect on high-income people, and high-tax states. But that does not rise to the level of unconstitutionality,” he said.
Earlier this year, New York lawmakers approved two proposals that would allow residents to circumvent the cap. Generally, they let taxpayers deduct the state and local taxes they pay in excess of $10,000 by other means.
Similar proposals have been considered in other states. But the IRS has said those strategies may not hold up. Further guidance from the agency is forthcoming, it said.
“The so-called SALT provision is un-American, said New York Governor Andrew Cuomo on a call with reporters Tuesday.
“This is their political attempt to hurt Democratic states,” he said.