Connecticut Joins New York and New Jersey In Challenging Tax Reform
HARTFORD, CT — The governors of Connecticut, New York, and New Jersey said Friday they plan to challenge the constitutionality of the state and local tax deduction cap that was part of the Tax Cuts and Jobs Act signed by Republican President Donald Trump in late 2017.
In a conference call with reporters, New York Gov. Andrew Cuomo said it offends the concept of federalism and tramples states rights.
The $10,000 cap on state and local taxes severely impacts 12 states and those states are forming a coalition to file a legal action challenging the constitutionality of that provision, Cuomo said.
It’s too soon to say when and where a lawsuit would be filed.
But Cuomo believes they have a very strong legal argument that the bill is “a fundamental violation of states rights and repugnant to the very concept of federalism that formed this nation.”
He said there’s also an argument that it’s a violation of the Equal Protection clause.
He said the 12 states that get hurt by the provision all happen to be Democratic states, all have virtually no representation in the U.S. Senate and a small minority of House members, and are states that Trump lost in the last election.
“There is no doubt the tax reform plan takes from the 12 and distributes to the remaining states,” Cuomo said.
He said it’s not even a new issue. He said it was raised before.
Going back to 1862, Cuomo said when President Abraham Lincoln proposed the first income tax to pay for the Civil War that bill said: “all other national state and local taxes shall first be deducted,” to determine a taxpayer’s liability for the income tax.
He said the state has a right to tax for state services.
“States are not colonies of the federal government,” Cuomo said. “Federalism was a covenant. It was shared power and the federal government shall not trample the states powers.”
Gov. Dannel P. Malloy, who has yet to announce plans for how the state might lessen the burden of the inability to deduct state and local taxes over $10,000, said it’s a dramatic break with past practice and a covenant that the state has with the federal government.
In Connecticut, the cap on state and local taxes would likely impact 171,118 filings representing hundreds of thousands of individuals. Those filings represent $10 billion in deductions they otherwise would have been able to claim, if they had not been capped.
“In so many ways these changes discriminate against our states, against our economies, against the individual citizens who live within our states and somebody has to stand up and say not at this time,” Malloy said. “It is fundamentally unfair and illegal.”
New Jersey Gov. Phil Murphy, who was inaugurated just 10 days ago, said he was happy to sign the letter of “common interest” with other like-minded sister states.
He said the state and local tax deduction is “unambiguous” and has “nothing to do with sound policy.”
He pointed out that filing a lawsuit doesn’t preclude the parties from trying to mitigate the impact on their states.
Cuomo has spoken about creating a new employer-side payroll tax with a credit against state income tax liability. The idea is that individuals would pay their state income taxes through the employer-side payroll taxes.
But that would only work for individuals who are employed by companies. Many individuals who are self-employed or freelancers would be out of luck.
It’s unclear how many residents Connecticut might be helped by that change.