Paul L. Caron

Thursday, July 19, 2018

Four Blue States Sue To Block Trump Tax Law's $10,000 State & Local Tax Deduction Cap

Wall Street Journal, Democratic States Sue Trump Administration Over Tax Overhaul:

A coalition of states led by New York sued the federal government Tuesday, alleging that last year’s tax overhaul was politically motivated and designed to interfere with the rights of states to manage their finances. New Jersey, Connecticut and Maryland joined New York in the federal lawsuit filed in U.S. District Court in New York. The lawsuit takes aim at a part of the new tax law limiting federal tax deductions for state and local taxes to $10,000.

The plaintiffs said the new law raises the federal tax liability of millions of taxpayers in those states, making it more difficult for the states to maintain their taxation policies. The tax law also seeks to force the states to slash public spending, the plaintiffs said.

Wall Street Journal editorial, Albany’s Millionaire Tax Revolt:

The Republican tax bill is the law for 2018, but some progressives are mounting an insurrection against taxation without . . . loopholes for rich people. As a slogan it’s not the Boston Tea Party, but check out the revealing legal challenge from four states. ...

This is a sure legal loser, not least because tax reform merely rewrote the federal tax code. Congress didn’t touch a single state statute. The plaintiff AGs claim their states were somehow politically targeted, but the federal law applies to all 50 states uniformly.

States are always free to change their own state laws in response to the federal law, and several have. Michigan adjusted its law to make sure the state wouldn’t collect more money simply because of the change in federal deductions. New York has chosen to concoct a convoluted payroll tax-deduction scheme that the IRS is suggesting won’t pass legal muster. ...

For all the talk about how progressive states need high taxes for roads and free college, note that they are dumping taxpayer cash into lawsuits that are essentially campaign documents. These states apparently have money to burn.

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Awesome: "Prior to tax reform, blue states were already subsidizing red states in that they had an overall net-outflow to the federal treasury while red states had a net-inflow from the federal treasury."

Individual high income earners already subsidize low income earners in their own states through progressive state income taxes, or graduated property taxes. And individual high income earners in all states subsidize low income earners everywhere via progressive federal taxes.

States do not subsidize each other, that's a false statement. There is no money that goes from one state coffer to another state's budget.

Individuals who make more money subsidize individuals who make less, that's the truth of the U.S. tax code.

Posted by: MM | Jul 23, 2018 7:02:51 PM

Ruralcounsel - Prior to tax reform, blue states were already subsidizing red states in that they had an overall net-outflow to the federal treasury while red states had a net-inflow from the federal treasury. Why do red state politicians believe the high tax blue states should pay for the blue and the red states? Where is the self sufficiency and personal responsibility espoused by conservative politicians? The tax shelter is the artificially low state tax rates in red states not the SALT deduction.

Posted by: Awesome Anon Name | Jul 23, 2018 11:21:43 AM

@ Mike Petrik,

There's a greater need for a deduction of state taxes from federal taxes because federal tax rates are so much higher than state tax rates. The top marginal income tax rate on federal taxes is currently 39%, and in the past was >90%.

The top state income tax rate is around 12%. There's a danger that the federal government could tax people so heavily that it essentially wipes out state governments because there's no money left to tax without putting people in an acceptable state of penury.

There's no comparable danger of state governments taxing people heavily enough to leave nothing on the table for the feds. Plus state governments give something back--education, roads, transit, police & fire protection, public parks, libraries, etc. A third of the money doesn't disappear in Iraq and Afghanistan like with the Federal government.

Even under the pre-2017 system, blue states were paying a lot more in federal taxes than they were getting back in services (according to the Conservative Tax Foundation), because their populations have higher incomes and because military bases tend to be located in red states where land is cheap. And people are fine with that.

The problem is when the federal government tries to destroy funding for roads, schools, and public safety to fund corporate tax cuts for billionaires. And then raids churches. And universities. And saddles future generations with more public debt as the deficit increases. And basically grabs everything that isn't bolted down.

That's the problem.

Posted by: Over reaching GOP | Jul 23, 2018 10:45:46 AM

alleging that last year’s tax overhaul was politically motivated

A politically motivated law? Quick... where is my fainting couch?

Posted by: AMTbuff | Jul 20, 2018 2:56:58 PM

What happened to those progressives who have been claiming for decades that taxes need to be increased, and that their Blue states are the model of socially responsible public services. Turns out they can't give up their own little "tax shelters.:

Posted by: ruralcounsel | Jul 20, 2018 9:28:42 AM

In ordinary times, this would be a rather weak challenge. Nowadays, who knows?

Posted by: mike livingston | Jul 20, 2018 4:27:01 AM

Some legal scholars have asserted that principles of federalism require that the federal code offer a deduction for state taxes in order to avoid double tax and not impede state policy decisions. This argument strikes me as a stretch, but if true would also seem to require a state tax deduction for federal taxes paid -- something none of those legal scholars have yet pointed out.

Posted by: Mike Petrik | Jul 20, 2018 3:59:30 AM

Blue State Governors: "The wealthy should pay more in taxes. Except OUR wealthy!"

Posted by: MM | Jul 19, 2018 6:11:12 PM

What a snarky, nasty,editorial which shows no concern for regional interests. Perhaps the WSJ should start calling itself the Birmingham News.

Posted by: WSJ is nasty | Jul 19, 2018 5:02:12 PM