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Four blue states sue Trump administration over tax deduction cap

Gov. Andrew Cuomo (D-NY) has been one of the most outspoken critics of changes made by the 2017 tax overhaul. ( Drew Angerer/Getty Images)

Led by New York, four states sued the Trump administration on Tuesday in an effort to fight the cap on federal deductions for state and local taxes implemented as part of last year's GOP tax overhaul.

What are the details?

In the lawsuit, Connecticut, Maryland and New Jersey joined the Empire State in claiming that the $10,000 limit on SALT deductions — a limit which is only imposed on those who earn more than $150,000 per year — was designed to harm blue states. The plaintiffs are calling the new cap unconstitutional.

New York Gov. Andrew Cuomo (D) told reporters, "The federal government is hell-bent on using New York as a piggy bank to pay for corporate tax cuts and I will not stand for it," adding, "This is their political attempt to hurt Democratic states. It's totally repugnant."

Reuters reported that according to the Tax Policy Center, the average New Yorker claimed a $22,169 SALT deduction in 2015.

Maryland's Attorney General, Brian Frosh (D) said, "Eliminating the SALT deduction will jack up taxes for more than half a million Marylanders. It is an attack on state sovereignty. It will reduce funding for local law enforcement and for construction of infrastructure statewide, and it will cripple our ability to educate our kids."

Frosh did not explain how reducing the SALT deduction would impact Maryland services, since Maryland can still collect all the state taxes it wants under Federal law; the only change is that Maryland residents will not be able to deduct those taxes on their Federal tax returns.

Many tax experts don't see the lawsuit going anywhere. Tax Foundation executive vice president swiped away the plaintiffs' arguments, writing that "The concern that high state taxes might harm the competitiveness or attractiveness of a state like New York or Connecticut is a valid one, but the solution lays with revisiting those state tax rates rather than meritless litigation."

He told the Associated Press: "Congress can really do what it wants. It's really not much of a case."

Anything else?

Each state involved in the suit has passed state laws in an attempt to circumvent the SALT deduction limit, implementing schemes that allow taxpayers to "donate" to municipal accounts while claiming the funds are charitable contributions to be written off.

But the Trump administration is working to impose regulations preventing such workarounds.

The IRS warned in May that "Taxpayers should be mindful that federal law controls the proper characterization of payments for federal income tax purposes."

One last thing…
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