New York, 3 other states sue over federal tax reform law

Jon Campbell | Albany Bureau

Show Caption Hide Caption Video: Cuomo discusses House tax vote Gov. Andrew Cuomo on Thursday, Nov. 16, 2017, talks to reporters in Middletown in advance of the House vote to overhaul the tax code and end state and local tax deductions.

ALBANY - New York and three other states sued the federal government Tuesday in an attempt to overturn the $10,000 cap on state and local tax deductions, which was included in the federal tax reform approved by Congress and President Donald Trump last year.

Gov. Andrew Cuomo and state Attorney General Barbara Underwood announced the lawsuit Tuesday morning, arguing that the new cap infringes on the four states' constitutional right to tax as they see fit.

The lawsuit was filed in Manhattan federal court on behalf of New York, New Jersey, Connecticut and Maryland.

Cuomo had been threatening a lawsuit for more than six months, claiming that the state and local tax deduction cap, known as SALT, unfairly targeted Democratic, high-tax states like New York.

"The so-called SALT provision was un-American," Cuomo told reporters Tuesday. "What you did was you divided the states. You penalized the Democratic states."

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The U.S. Department of the Treasury, the lead defendant in the lawsuit, said the complaint was under review.

How SALT works

The SALT cap limited the amount of state and local tax — including property tax and state income tax — that can be deducted from married and individual federal tax filings.

The $10,000 limit took effect this year and will apply when people fill out their federal returns in 2019. Previously, taxpayers were allowed to deduct their entire state and local tax bill from their federal returns.

The cap hits high-tax, high-wealth states like New York particularly hard, with about 30 percent of the state's taxpayers expected to be impacted. It only applies to those who itemize their federal returns and pay more than $10,000 in state and local taxes.

The state Department of Taxation and Finance estimated that New York taxpayers impacted by the cap would pay an additional $14.3 billion in federal taxes this year, according to the suit.

But the estimate doesn't account for any savings that taxpayers would receive through the federal tax law, such as lower income-tax rates.

In the lawsuit, Underwood says the cap will essentially force the states to "choose between their current level of public investments and higher tax rates," which she claims interferes with their "sovereign authority."

Chances of success

A conservative-leaning think tank said the lawsuit has little chance of success.

Joseph Bishop-Henchman, executive vice president of the Tax Foundation, said the states' argument that the cap infringes on states' rights is "not very persuasive."

The cap is "not unconstitutional," said Bishop-Henchman, an attorney.

"Congress can do almost what it wants on who pays, what's deductible and what's exempt from the income tax," he said. "The main limit is that it has to be geographically uniform, the law has to apply everywhere in the United States, which this law does."

Cuomo, also an attorney, and his administration defended the lawsuit, arguing that the cap unfairly targeted Democratic states.

The Democratic governor and his top aides pointed to comments by Treasury Secretary Stephen Mnuchin, who said last year that he hopes the tax reform "sends a message" to state governments that they "should try to get their budgets in line."

"The cap and the SALT deduction impermissibly targets New York state for unfavorable treatment," said Alphonso David, counsel to the governor.

"It's OK in some instances to treat states unequally, but what the federal government cannot do is: equally sovereignty cannot be infringed."

Cuomo and lawmakers, meanwhile, approved state-level measures earlier this year meant to sidestep the $10,000 cap, though it remains unclear whether the IRS will allow them to stand.

One measure would allow for the creation of charitable funds that taxpayers could elect to give to in lieu of a portion of their taxes. Those charities would then distribute the money to schools and local governments.

The IRS issued guidance in May, warning that it would soon issue regulations governing such transfers.

JCampbell1@Gannett.com

Jon Campbell is a correspondent with USA TODAY Network's Albany Bureau.