Blue States Dependent on High Taxes Sue Federal Government Over Tax Cuts

| JUL 19, 2018 | 2:10 PM

Michael Nagle/Getty Images

On Tuesday morning, Gov. Andrew Cuomo (D-N.Y.) announced that his state was joining a lawsuit with Connecticut, New Jersey, and Maryland to contest the federal government's implementation of specific provisions in the Trump tax cuts.

Specifically, these blue-state governors take issue with the $10,000 cap that has been placed on the State and Local Tax (SALT) deduction. The irony of the lawsuit being filed by Democrats is that this deduction applies mostly to high-income taxpayers.

According to CNBC, only 30 percent of filers took a SALT deduction in 2014, and 88 percent of those had incomes in excess of $100,000.

The prior deduction had the net effect of states with low property and income taxes subsidizing those with higher taxes. Since those taxes were deductible, states could raise them and know full well that their constituents wouldn't feel the pinch once they itemized.

The arguments in the case focus on the 10th and 16th amendments and an alleged assault on the sovereignty of states to legislate as they see fit. However, the Tax Foundation described these claims as “meritless” and indicated that New York “still controls its tax and spending system.”

Though Cuomo described the tax cut provision as “politically motivated,” the lawsuit only seems more so. It comes on the heels of states doing their best to circumvent the tax cut legislation, efforts that the IRS has given every indication it will shoot down.

States had tried implementing workarounds like adding charitable deductions after property taxes were paid or swapping income taxes for payroll taxes. Both of these are perceived by the federal government as contrary to the law's intent of passing along tax cuts to the citizenry.

It would also require some mathematical gymnastics. Converting income taxes to payroll taxes would result in employers lowering wages — which would then have to be offset with a wage credit. And even though states may declare a deduction charitable for their purposes, the IRS still dictates the tax treatment under federal law.

All the while, it seems odd that while Democrats are repeating talking points that these tax cuts favor the rich, they are contesting a provision of the cuts that disproportionately impacts the very population they believe should be taxed more.

Please note: This is a commentary piece. The views and opinions expressed within it are those of the author only and do not necessarily reflect the editorial opinion of IJR.