The tax reform of 2017 ushered in a new rule that for the first time in the history of our federal tax system completely capped the deduction for state and local taxes (these are sales taxes, state income tax and property tax). The maximum deduction allowed in 2019 will be $5,000 (or $10,000 for a married filing jointly couple).
In a recent post, we provided additional details on the rule. Now we can report that four states have sued the IRS – New York, New Jersey, Maryland and Connecticut – to eliminate the cap. California somewhat surprisingly is not on the list.
State rights argument goes back to 1861
Forbes has interesting coverage on the plaintiffs’ arguments. While the courts truck down the first federal income tax system as unconstitutional. It entered law through after ratification of the Sixteenth Amendment in 1913.
The SALT deduction protected state rights by preserving their authority over choices about investing in their people, business, infrastructure. It was also tied to the Tenth Amendment that laid out the principles of federalism.
The plaintiffs argue that by capping the deduction the federal government is in effect compelling states to cut public spending. Since the state can no longer make tax and fiscal policy decisions without federal intervention the cap violated the constitution.
The plaintiff states also point to the disproportionate impact faced by taxpayers in certain states. For example, New York residents make up about 6 percent of the national population, but they will pay almost 10 percent of federal taxes.
Because state and local taxes easily pass the threshold for many California residents, the outcome will have an impact. We will continue to track and report the progress of the case.