The Tax Cuts and Jobs Act ("T.C.J.A.") placed a $10,000 cap on the amount of state and local tax ("S.A.L.T.") an individual taxpayer can deduct on his or her Federal income tax returns. The states of New York, New Jersey, Connecticut, and Mary- land brought a suit against the Federal government challenging the validity of the restriction on the S.A.L.T. deduction alleging it to be an "unconstitutional assault" on the state's sovereign choices.
The legal argument requires an interpretation of the 10th Amendment, concerning states' rights, and the 16th Amendment, which establishes Federal powers of income taxation. The action argues that the new law effectively overturns a longstanding precedent that the Federal government's income tax power was and would remain subject to federalism constraints. It also argued that the limits on the deduction, and the potential economic damage as a result of its implementation, deliberately seek to compel certain states to reduce their public spending.
The complaint alleged that as a result of the new cap, New York taxpayers will be burdened with an additional $14.3 billion in Federal taxes in the tax year 2018 and an additional $121 billion between 2018 and 2025, the year when the new cap is set to expire. The other plaintiff states will experience similar effects. The plaintiff states argued that they will bear the cost of paying for the new tax cuts and will receive the least benefits from the T.C.J.A. The plaintiff states allege that, by unfairly and disproportionally benefiting taxpayers of other states at the expense of their own taxpayers, the T.C.J.A. has injured their sovereign and quasi-sovereign interests.
The complaint further states that the new cap on the S.A.L.T. deduction is likely to adversely affect the plaintiff's states' real estate market. Under the pre-T.C.J.A. law, homeowners were allowed to deduct the full cost of property taxes on their Federal income tax returns. The new limitation on the deduction will increase the cost of owning a home, which will in turn depress home values.
The plaintiff states further allege that they attempted to take legislative action to combat the harmful effects of the new cap; however, in response to these efforts, the Federal government has signaled that it intends to prevent such action. The complaint contends that the Federal government is not only intentionally targeting the plaintiff states for adverse treatment but is also intentionally seeking to interfere with the states' sovereign authority over taxation and fiscal policy.
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