For decades, liberal strongholds across the country have relied on the federal government to give their citizens tax breaks to compensate for their own prohibitively high state tax rates. Therefore, blue states like New York, Connecticut, Maryland and New Jersey were in for a rude awakening after Republicans passed their 2017 tax overhaul and imposed a $10,000 cap on the federal tax deduction for state and local taxes, known as “SALT.”
In an effort to force the federal government to continue subsidizing their sky-high state and local taxes, a coalition of blue states is suing the Trump administration in the U.S. District Court for the Southern District of New York, challenging the constitutionality of the SALT deduction cap.
Blue state burden
“The new cap effectively eviscerates the SALT deduction, overturning more than 150 years of precedent by drastically curtailing the deduction’s scope,” the states said in the official complaint.
Citizens who take advantage of SALT deductions are typically able to write off all or most of the money they pay to property, income and sales taxes. Prior to the GOP tax reform, Congress had no problem allowing federal taxpayers to deduct their state and local tax burdens from their federal income tax returns in amounts that often exceed $10,000.
Of course, that was before the Trump administration. Now, however, Republicans have re-evaluated a system that allows states to continue levying exorbitantly high tax rates that may be offset by the federal government.
“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,” said Joseph Bishop-Henchman, the executive vice president of the conservative-based Tax Foundation.
Democratic leaders like Rep. Nancy Pelosi (D-CA) have referred to the Republican tax cuts as “crumbs” for the working class and have accused the plan of solely benefiting wealthy Americans and corporations. Yet, these same liberal lawmakers are pursuing litigation against the Trump administration in a plot that overwhelming benefits the wealthy taxpayer — the same individuals whom the left accuses of not paying their fair share.
Democrats fear that they may experience a brain drain in their states as wealthy taxpayers flee to greener pastures. This anxiety caused New York Attorney General Barbara Underwood to issue a video on social media accusing Congress of unfairly trying to shape local tax policy. “
“Last year for the first time Congress drastically limit the deduction imposing an enormous burden on taxpayers in our states through a law that was deliberately aimed at coercing New York and similar states to change their taxation and fiscal policies,” she told her constituents on Tuesday.
Democratic state assemblies are taking the federal government to court after the U.S. Treasury Department “[put] people on notice” that several possible “SALT cap workarounds” proposed by several state legislatures may not, in fact, work. Even though the IRS is unlikely to honor their solutions to avoiding the deduction cap, New York, New Jersey and Connecticut have each enacted legislation that awards residents with tax credits for making tax-deductible donations to certain state and local funds, since charitable donations of these type weren’t capped by the GOP’s tax reform bill.
However, the IRS warned that “taxpayers should be mindful that federal law controls the proper characterization of payments for federal income tax purposes.” Experts like Tax Foundation’s Senior Policy Analyst Jared Walczak have emphasized that the IRS’s “substance-over-form” doctrine applies, meaning that the IRS could end up treating workaround donations as tax obligations that are not deductible.
Last year, Republicans successfully reversed a decades-long tradition that allowed liberal states to levy the highest tax rates in the country while relying on the federal government to bankroll their schemes. Suddenly, the left has changed face and has learned to value the contributions of the wealthy taxpayer — their money.
Fortunately, their misguided campaign to continue a morally reprehensible policy of take-and-take is likely to be defeated, even if a conservative majority in the Supreme Court has to see to it.