Four states sue to void cap on state and local tax deduction

Four US states yesterday sued the federal government to void the new $10,000 cap on the federal deduction for state and local taxes, included as part of the President Donald Trump’s 2017 tax overhaul.

The lawsuit by New York, Connecticut, Maryland and New Jersey came seven months after Trump signed into law the $1.5tn overhaul, which also lowered taxes for many wealthy Americans and slashed the corporate tax rate.

It also adds to the many legal battles between Democratic-led and Democratic-leaning states, including several that impose comparatively high taxes, and the Trump administration.

Andrew Cuomo, New York’s Democratic governor, said in a statement: “The federal government is hellbent on using New York as a piggy bank to pay for corporate tax cuts and I will not stand for it.”

The US Department of the Treasury, which along with Treasury Secretary Steven Mnuchin is among the defendants, was not immediately available for comment.

Taxpayers had before this year enjoyed an unlimited federal deduction for state and local taxes, or the SALT deduction.

But under the cap, individuals and married taxpayers filing jointly who itemize deductions may deduct only up to $10,000 annually for state and local income, property and sales taxes.

Critics say the cap disproportionately harms high-tax states, many of which lean Democratic.

Voters in New York, Connecticut, Maryland and New Jersey favoured Hillary Clinton, a Democrat, in the 2016 presidential election.

According to the lawsuit, capping the SALT deduction will force New York taxpayers alone to pay an additional $14.3bn in federal taxes this year, and another $121bn through 2025, when the cap is scheduled to expire.

The states said 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.

They also said it “effectively eviscerates” a deduction that has been on the books since 1861, and unconstitutionally intrudes on state sovereignty.

The lawsuit was filed in the US District Court in Manhattan.