The States of New York, Connecticut, Maryland, and New Jersey filed a federal court lawsuit this week challenging the constitutionality of the new $10,000 cap on the federal tax deduction for state and local taxes (SALT). The lawsuit, filed in the Southern District of New York, names as defendants the Secretary of the Treasury, the Acting Commissioner of Internal Revenue, the Internal Revenue Service, and the United States of America. The States allege that the SALT deduction cap, enacted as part of 2017 tax reform, violates numerous provisions of the United States Constitution, including the Tenth Amendment, the Sixteenth Amendment, and Article I, Section 8.

According to a press release issued by New York Governor Andrew M. Cuomo, the lawsuit argues that the new SALT cap was enacted to target New York and similarly situated states, that it interferes with states’ rights to make their own fiscal decisions, and that it will disproportionately harm taxpayers in these states. An analysis by the New York State Department of Taxation and Finance shows that the cap will increase New Yorkers’ federal taxes by $14.3 billion in 2018 alone, and an additional $121 billion between 2019 and 2025. A press release issued by Connecticut Governor Dannel P. Malloy similarly estimated that Connecticut taxpayers will lose an estimated $10.3 billion in SALT deductions in 2018, and will increase Connecticut taxpayers’ federal income tax liability by approximately $2.8 billion in 2018.

The SALT deduction cap has been one of the most controversial provisions of the 2017 tax reform legislation.  We previously wrote about efforts by some states, including New York and New Jersey, to pass laws providing for mechanisms to work around the cap. These “workarounds” would allow taxpayers to make payments to specified entities in exchange for a tax credit against state and local taxes owed.  In May, the IRS the Internal Revenue Service notified taxpayers that it would soon be issuing regulations addressing the deductibility of state and local tax payments for federal income tax purposes, and issued a not-so-subtle reminder that federal law controls the characterization of payments for federal income tax purposes regardless of the characterization of the payments under state law.

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