4 states sue feds over tax deduction limits

Claiming their states have been unfairly targeted, the attorneys general of Connecticut, New York, Maryland and New Jersey filed a lawsuit Tuesday morning challenging the cap on state and local tax deductions in the 2017 federal tax reform.

The suit argues the $10,000 limit on federal income tax deductions for state and local taxes, known as SALT, is unprecedented and unconstitutional. Taxpayers in Connecticut and some other states are disproportionately hurt by the cap, the suit states, and the cap hamstrings states’ ability to make fiscal decisions.

“President (Donald) Trump’s repugnant tax cuts gave massive handouts to the wealthiest one percent and stuck middle class taxpayers with the bill,” Gov. Dannel P. Malloy said in a written statement. “Perhaps most concerning, this law discriminates against Connecticut taxpayers, who stand to lose over $10 billion in state and local tax deductions.”

Approximately 11,200 Connecticut residents claimed a SALT deduction in 2015, according to Internal Revenue Service data. They claimed an average of $19,665 in deductions. The 2017 changes, enacted with virtually no public debate, mean deductions are now capped at $10,000 for the combined local property taxes and state taxes — typically the income tax — for individuals or married couples filing jointly. For married taxpayers filing separately, each taxpayer is limited to a $5,000 deduction.

The lawsuit names Steve Mnuchin, secretary of the U.S. Department of the Treasury, David Kautter, acting commissioner of the U.S. Internal Revenue Service as plaintiffs, and their departments.

Supporters of the tax reform act say taxpayers in states such as Connecticut will see more cuts than additional costs, overall. And they say the limits are fair because the deductions were hurting federal tax collection.

“We can’t have the federal government continue to subsidize the states,” Mnuchin told CNBC in October, two months before the reform act passed. “That’s a major loophole that we’re trying to close in simplifying taxes.”

But Malloy said Tuesday hundreds of thousands of residents could see a tax increase even as their property values decrease as a result of the cap.

Michael Cummo / Hearst Connecticut Media file photo Connecticut attorney general George Jepsen waves prior to Gov. Dannel Malloy’s State of the State address inside the House chamber of the State Capitol in Hartford on Feb. 7.