Despite the fact that millions of their citizens are enjoying the “crumbs” of the tax cuts, including bonuses from their now prosperous companies, four states are filing lawsuits against the IRS, claiming the tax law is unconstitutional.

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.

The new, New York Attorney General Barbra Underwood posted a video on Twitter to make the announcement, saying her state “won’t be bullied.”

#BREAKING: We just filed suit to protect New Yorkers from the federal government’s unconstitutional tax law, which drastically cuts the state and local tax deduction. New York will not be bullied. https://t.co/MVH4wfbpZ0 pic.twitter.com/0vtxLYgh8c — NY AG Underwood (@NewYorkStateAG) July 17, 2018

The new cap on deducting state and local taxes is unconstitutional for 2 key reasons. It goes beyond settled limits on the federal government’s power to impose an income tax. And it deliberately targeted—and will disproportionately harm—New York and similar states.

In fact, the unfair tax burden supposedly imposed by the loss of the SALT (State and Local Tax) deductions will be the core of the states’ argument.

The complaint argues that those who drafted the Sixteenth Amendment understood that “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 SALT cap, the plaintiffs argue, disregards States’ rights and the “distinct and inviolable role in our federalist scheme.” And, the complaint continues, “as many members of Congress transparently admitted, it deliberately seeks to compel certain States to reduce their public spending.” That, the complaint argues, is unconstitutional. The plaintiffs argue the SALT cap will raise the federal tax liability of millions of taxpayers. By increasing the federal tax burden on taxpayers in targeted states, the plaintiffs say that it will be more difficult for the states to maintain their taxation and fiscal policies. That means that they cannot make policy decisions without federal interference – a direct violation, they argue, of the Sixteenth Amendment. And, further, they say that the cap “violates bedrock principles of federalism enshrined in the Tenth Amendment.”

The court arguments by the plaintiffs should be fascinating. As a reminder, here is a passage from the 16th amendment, adopted in 1913.

The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.

And subsequent to its passage, courts have been exceedingly generous their interpretation of the amendment to support income taxation. For example, in the Penn Mutual Indemnity case, which dealt with the issue as to whether the Sixteenth Amendment allows a direct tax on “wages, salaries, commissions, etc. without apportionment”, The United States Court of Appeals for the Third Circuit agreed with the Tax Court, stating:

…It could well be argued that the tax involved here [an income tax] is an “excise tax” based upon the receipt of money by the taxpayer. It certainly is not a tax on property and it certainly is not a capitation tax; therefore, it need not be apportioned. We do not think it profitable, however, to make the label as precise as that required under the Food and Drug Act. Congress has the power to impose taxes generally, and if the particular imposition does not run afoul of any constitutional restrictions then the tax is lawful, call it what you will.

It will be interesting to see how this group of Attorneys General argues that removing a deduction is an unconstitutional restriction.

However, I’ll sure say this for President Trump and his policies… he sure has managed to get blue states to embrace federalism with a passion that is truly astonishing. It’s a miracle.



