New York, New Jersey and Connecticut have been fighting a new cap on state and local tax deductions ever since it was included in the 2017 Republican tax overhaul.
They are losing.
The tax law capped the federal deduction for state and local taxes, or SALT, at $10,000. That set off campaigns to eliminate the provision by politicians in states with high income taxes and high property taxes, which tend to be Democratic states. It also set off an effort to find legal workarounds that would ease the sting of the SALT cap out of fear that high-earning residents would move out of state.
Now, most of those laws have been invalidated and those that remain are on shaky legal ground or taxpayers have decided they aren’t worth the hassle.
Four northeastern states, including New York and New Jersey, will argue in a court hearing later this month that the cap infringed upon their constitutional right to tax. Legal experts, including those who would like to see the states win, have said the case is a long shot.
Final Blow
Members of Congress have introduced several bills to repeal or raise the cap. Such legislation might pass the Democratic-controlled House, but would die a quick death in the Republican-led Senate that has no interest in unwinding parts of their signature tax law.
The Treasury Department late Tuesday dealt the final blow. It issued regulations that prohibit programs in high-tax states that would allow filers to circumvent the law. Treasury said those programs allowed taxpayers to claim too many tax breaks.
States including Connecticut and New York have passed laws allowing residents to to donate to a state-created charitable fund instead of paying property taxes. That person would then get to write off the donation as a charitable gift on his or her federal taxes and get a state tax credit for some of that. The regulations killed these programs.
Democrats say Republicans targeted residents of states they control as a way to pay for the $1.5 trillion tax cut. Since the law was enacted, governors and lawmakers from high-tax states have decried the change as a GOP assault on Democratic strongholds.
“This Trump administration seems to wake up in the morning trying to think up
ways to screw my state,” Representative Bill Pascrell, a New Jersey Democrat, said in a statement Tuesday.