HARTFORD, CT — Connecticut joined three other states Tuesday and filed a federal lawsuit against U.S. Treasury Secretary Steven Mnuchin and the U.S. Internal Revenue Service over the new new $10,000 cap on the federal tax deduction for state and local taxes.
The lawsuit filed in the Southern District of New York argues that the new cap on the state and local tax (SALT) deduction was enacted to target Connecticut and similarly situated states, and interferes with states’ rights to make their own fiscal decisions. It also argues it will disproportionately harm taxpayers in these states.
New York, New Jersey, and Maryland are the other states named as plaintiffs in the lawsuit. All the states are represented by Democratic governors.
A spokeswoman for the U.S. Internal Revenue Service said the agency does not comment on pending litigation.
“President Trump’s repugnant tax cuts gave massive handouts to the wealthiest one percent and stuck middle class taxpayers with the bill,” Connecticut Gov. Dannel P. Malloy said. “Despite massive economic promises from Republicans, real wages have actually decreased since the passage of the tax cut.”
The lawsuit says the cap on the deduction overturns more than 150 years of precedent and violates states rights.
“As the drafters of the Sixteenth Amendment and every subsequent Congress have understood, the SALT deduction is essential to prevent the federal tax power from interfering with the States’ sovereign authority to make their own choices about whether and how much to invest in their own residents, businesses, infrastructure, and more—authority that is guaranteed by the Tenth Amendment and foundational principles of federalism,” the complaint reads.
The Tax Cuts and Jobs Act signed by Republican President Donald Trump in late 2017 “deliberately seeks to compel certain States to reduce their public spending. This Court should invalidate this unconstitutional assault on the States’ sovereign choices.”
The lawsuit argues that the SALT deduction exists to “further ensures that States have the prerogative to determine the appropriate mix and level of public investments to make on behalf of their residents, as well as the authority to choose how to raise revenue to pay for those investments.”
Connecticut estimates that the elimination of the cap will cause Connecticut taxpayers to lose an estimated $10.3 billion in SALT deductions in 2018, and will increase Connecticut taxpayers’ federal income tax liability by approximately $2.8 billion in 2018.
In New York, the new cap will be responsible for New York taxpayers paying an additional $14.3 billion in federal taxes in tax year 2018, and an additional $121 billion between 2018 and 2025, the year when the new cap is set to expire.
“This revenue is a primary means by which Congress is offsetting the cost of the tax cuts in the 2017 Tax Act,” the complaint states.
The plaintiff states will benefit the least from the Tax Cuts and Jobs Act.
“By unfairly benefiting taxpayers of other States at the expense of the taxpayers of Plaintiff States, the 2017 Tax Act injures the Plaintiff States’ sovereign and quasi-sovereign interests,” the complaint reads.
The deduction was also meant to coerce states to change their taxation and fiscal policies by reducing the wealth of taxpayers in those states and undermining the revenue possibilities.
According to the complaint Mnuchin said the new cap was intended to “send a message” to the plaintiff states that they need to alter the choices they have made about publicly investing in their states’ residents and businesses. A Republican lawmaker said the cap was intended to “kick” the plaintiff states.
The plaintiff states argue this “violates principles of equal state sovereignty.”
The states are seeking an injunction that would bar the implementation of the cap on the deduction.
The plaintiffs are represented by New York Attorney General Barbara Underwood.