New York, New Jersey pursue another battle in SALT deduction war

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New York, New Jersey and Connecticut are again suing President Donald Trump’s administration over a provision in the 2017 tax law that limited write-offs for state and local taxes.

The lawsuit filed Wednesday asks a court to stop recent Internal Revenue Service regulations that invalidated state workarounds to help residents maximize the amount of state and local taxes, or SALT, they could deduct. The effort is one of several to reverse one of the most politically contentious changes in Trump’s 2017 tax law, and it’s not clear if it will get any more traction.

The 2017 Republican tax law limited the amount of SALT deductions to $10,000. Write-offs were previously unlimited. Democrats in Congress and state lawmakers said the change was intended to target Democratic-led states that tend to have higher taxes. New York Governor Andrew Cuomo called it “economic civil war.”

The case is a “long-shot” and likely to be thrown out by a judge, said Lawrence Zelenak, a tax law professor at Duke University School of Law. The legal challenge would have a better chance coming from someone who was hurt by the IRS regulations, such as a wealthy individual who paid more in taxes because of the rules, he said.

This is the second lawsuit northeastern states have filed in an attempt to nullify the SALT cap. The village of Scarsdale and the town of Rye, both wealthy New York City suburbs, also filed a lawsuit against the IRS regulations Wednesday. Last year, the states sued the Trump administration seeking to get the cap itself declared unconstitutional. That case, which many legal experts also say is a long-shot, is still working its way through the courts.

Democrats in Congress are also seeking to change the law, though that is likely to get blocked in the Republican-controlled Senate.

The White House on Wednesday cast the issue as one of fairness. Doug Hoelscher, the White House’s director of intergovernmental affairs, told an audience in Washington that the changes mean the federal government is no longer subsidizing certain states.

Under SALT, some states “were subsidized by federal tax policy,” he said at an event hosted by the Heritage Foundation in Washington. “They can still do whatever they want to do. We’re just not going to subsidize what they’re doing anymore. And so — why should we subsidize some states versus others?”

“Proponents of the cap were clear about their objectives,” the states said in the lawsuit filed in U.S. District Court in the Southern District of New York. The states said that according to Treasury Secretary Steven Mnuchin, “The cap would ‘send a message’ to states with generous social welfare programs that their tax and spending policies would need to conform to those of the administration and the Republican Congress.”

The IRS in June dealt the final blow to many of the workarounds passed by state legislatures to help residents circumvent the cap. Treasury said those programs allowed taxpayers to claim too many tax breaks.

States including Connecticut and New York have passed laws allowing residents to donate to a state-created charitable fund instead of paying property taxes. That donation could then be written off as a charitable gift on an individual’s federal taxes and get a state tax credit for some of that. The regulations killed these programs.

Members of Congress have introduced several bills to repeal or raise the cap, which was one of the few provisions in the 2017 GOP law to offset the tax cuts. A House Ways and Means subcommittee held a hearing last month to discuss changes to the SALT cap, but House Democrats are still considering if and when to bring a bill to a vote.

Such legislation might pass the Democratic-controlled House but has little chance of advancing in the Republican-led Senate that has no interest in unwinding parts of the GOP’s signature tax law.

The case is State of New Jersey et al v. Mnuchin et al, 19-cv-06642.

— With assistance from Josh Wingrove

Bloomberg News
SALT deduction Tax deductions State taxes Steven Mnuchin Andrew Cuomo