Despite the fact that millions of citizens are enjoying the “crumbs” tossed to them via the tax bill passed last December, four states are angry over the cap on state and local tax deductions allowed on Federal taxes, saying that it exceeds the taxing authority of Congress, and that the new tax law is unconstitutional. The reason, of course, is that these states have extremely high levels of taxation (some might say punitive) – much higher than those in most of our states. The four states suing are (no surprise) New York, New Jersey, Connecticut, and Maryland.
Under federal tax law, filers are allowed to deduct property taxes (the local part) and either state income or sales taxes. But under the Tax Cut and Jobs Act (TCJA), the SALT deduction is now capped at $10,000. This deduction had been particularly valuable in high-tax, high-house-price states such as California and the four now suing the federal government.
Republicans limited the deduction for two reasons. First, doing so helped to offset some of the lost tax revenue from lower rates. And second, the deduction distorts the economy, acting as a subsidy for high-tax (and, yes, Democratic-leaning) states. When a state raises its taxes, the federal government ends up assuming part of the burden, because residents are able to deduct their higher payments from their federal taxable income.
Unsurprisingly, high-tax blue states have been fighting tooth and nail against this reform. This latest argument might be the silliest yet, as it makes no sense economically or legally. The four states claim that limiting the SALT deduction violates both the Tenth and 16th Amendments, as well as Congress’s Article I taxing powers. The Tenth Amendment reserves unspecified powers to the states, while the 16th Amendment provides the federal government a wider ability to charge income taxes. In Article I, meanwhile, Congress is given certain taxing powers but limited in what it can force on states.
The Tax Policy Center estimated that 84 percent of the benefit of the SALT deduction before the TCJA went to households in the top 20 percent of income earners. Blue states that might be expected to favor a tax reform that increased the progressivity of the tax code (meaning it tilts the tax burden toward the rich) are instead busy inventing ways to preserve this deduction for their rich residents. This lawsuit has little merit other than to serve as a clear signal that political leaders in these states have joined the anti-Trump Resistance.
All of which goes to once again prove that it is the Democrats who want as much money as they can possibly extract from the citizens to use as they “see fit”. Who cares if the little guy is benefiting from a reduction in his taxes, and that his employer is raising salaries and bonuses because their tax burden is decreased? /s