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Noonan’s Notes Blog is written by a team of Hodgson Russ tax attorneys led by the blog’s namesake, Tim Noonan. Noonan’s Notes Blog regularly provides analysis of and commentary on developments in the world of New York and multistate tax law. Noonan's Notes Blog is a winner of CreditDonkey's Best Tax Blogs Award 2017.

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Breaking News—4 States Sue the Feds Over the "SALT" Deduction Cap

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Well, it happened. Back in January, New York’s Governor Andrew Cuomo announced that the State was considering, among other things, a lawsuit against the federal government for taking away the SALT deduction as part of the 2017 tax overhaul. We talked about that issue here, and I've also talked more generally about the pain and suffering (and residency changes) caused by the loss of the SALT deduction. But yesterday, New York followed through in court, and it had some helpers.

Specifically, four states — New York, Connecticut, New Jersey and Maryland—banded together and filed a complaint in the U.S. District Court for the Southern District of New York against the federal government arguing that the SALT deduction cap is unconstitutional and should be blocked from enforcement.  In its papers, which read more like an advocacy piece than a legal complaint, the states argue that the SALT cap: (1) was enacted to target New York and similarly-situated states; (2) that it interferes with states' rights to make their own fiscal decisions; and (3) that it disproportionately harms taxpayers in those states. New York State Governor Cuomo, in a press call, said the cap violates the 10th Amendment, the 16th Amendment and Article 1, Section 8 of the U.S. Constitution. He further noted, “the federal government is hell-bent on using New York as a piggy bank to pay for corporate tax cuts."

“The new cap disregards Congress’s hitherto [hitherto! Nice!] unbroken respect for the states’ distinct and inviolable role in our federalist scheme,” the complaint said. “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 go on to say in the complaint that the cap will depress home prices, spending, job growth and economic growth, and impede their ability to pay for essential services such as schools, hospitals, police, and road and bridge construction and maintenance.

I pretty much make my living disagreeing with a lot of what states do around taxes, but as one of those blue-state taxpayers, I’m siding with the states on this one! Dollar-wise, this is no small matter. With fewer deductions, taxpayers pay more taxes. The SALT cap will increase New Yorkers' federal taxes by $14.3 billion in 2018 alone, and an additional $121 billion between 2019 and 2025. Some of those amounts will come from the Noonan family budget!

But are the states likely to find success in this litigation? It seems unlikely, and perhaps this is more of a political exercise than a legal one. Indeed, in this April 2018 Tax Foundation report, the writers criticize some of the arguments made by the states in the complaint. But the report doesn’t address all of the causes of action raised in the complaint, including the alleged violation of the 16th Amendment and Article 1, Section 8 of the Constitution. So with the right judge, you never know! Stay tuned for further updates.

Topics: Tax Reform

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