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East Coast States Will Sue Feds Over Tax Law

New York Governor Andrew Cuomo announced yesterday that a coalition of East Coast states will sue the federal government over provisions in the recently passed tax reform bill.

At issue is the $10,000 limit on deductions for state and local taxes. Cuomo says that provision is "an economic missile" aimed at blue states.

Fox News:

"The elimination of full state and local deductibility is a blatantly partisan and unlawful attack on New York that uses our hardworking families and tax dollars as a piggy bank to pay for tax cuts for corporations and other states,” Cuomo said in a statement. “This coalition will take the federal government to court to protect our residents from this assault."

A press release from Cuomo’s office claimed that the elimination of full SALT deductibility will cost New York $14.3 billion.

The move has picked up support from Connecticut Gov. Dannel Malloy and New Jersey Gov. Phil Murphy, who just replaced  Chris Christie.

"Capping the State and Local Tax deduction had nothing to do with sound policy," Murphy said. "It is a clear and politically motivated punishment of blue states — like New Jersey and our neighbors —who already pay far more to the federal government than we receive.”

The lawsuit is just the latest attempt by Democratic governors and other high-profile lawmakers to thwart the tax bill. While a number of major companies have announced bonuses tied to the bill, and firms across America are preparing to revise their income tax withholding for workers, Democrats also have downplayed gains for average Americans as "crumbs."

It's not clear what the legal theory is behind this suit. The limit on deductions affects taxpayers in every state, not just the three that are suing. And good luck trying to prove that Congress deliberately and with malice targeted taxpayers in blue states with this measure.

From the legal analysis website Verdict:

Accordingly, whether under the First Amendment or in the application of general principles of federalism, the courts should be prepared to invalidate provisions of the tax code that discriminate against blue states out of hostility to those states or the voters who live there. Establishing those abstract principles should be relatively simple. The difficulty would arise when attempting to prove illicit intent.

Numerous tax provisions benefit or burden residents of some states more than others. Tax incentives for installing new solar panels benefit residents of sunnier states more than those with less direct sunlight. Changes in credits, deductions, and exemptions for dependent children will be felt differently in Utah—the state with the highest birth rate—than in New Hampshire—the state with the lowest. Tax law allows businesses to depreciate some kinds of assets more quickly than other kinds of assets, thereby favoring states with more of the businesses that make use of the favored assets. Given the tax code’s complexity, nearly every provision will have some disparate impact on some state or another.

The question, therefore, is not whether the new cap on SALT deductibility disfavors taxpayers in blue states relative to the prior provision. It clearly does that. The question is whether that differential impact resulted from an invidious congressional motive.