The suit was
filed in the U.S. District Court for the Southern District of New York, and
includes as defendants the U.S. Treasury Secretary and Commissioner of Internal
New York, New
Jersey and Connecticut, which are high-tax states whose taxpayers will be
significantly affected by the new limit, formed a coalition in January to
challenge the limit. Maryland joined the
coalition in May.
Related: Repayments Under U.S. Payback Agreement No Longer Deductible
argue that the limit violates the 10th and 16th Amendments to the Constitution,
and also Article 1, section 8. The complaint notes:
“[T]he new cap effectively eviscerates the SALT deduction, overturning more
than 150 years of precedent by drastically curtailing the deduction’s scope. As
the drafters of the Sixteenth Amendment and every subsequent Congress have
understood, the SALT deduction is essential to prevent the federal taxing power
from interfering with the States’ sovereign authority to make their own choices
about whether and how much to invest in their own residents, businesses,
infrastructure, and more-authority that is guaranteed by the Tenth Amendment
and foundational principles of federalism.”
also allege that Congress violated Article 1, section 8, by attempting to
“coerce the states into lowering their taxes and cutting the services those
taxes support.” The complaint includes an economic analysis that the states
argue shows the limit will result in raising taxes on residents, decreasing
home values, and making it more difficult for states to raise the revenue they
need to provide essential services.
experts expressed doubt that the lawsuit will be successful, but also believe
that it will advance and be heard at some point. When that might be is unknown.
However, a rapid resolution is unlikely, and taxpayers should assume that their
state and local tax deductions will be limited to $10,000 for 2018.
that gross up for taxable relocation must take account of the reduced state and
local tax deduction, which will negatively affect some transferees. Those
transferees whose taxes are not reduced under the TCJA may be under-withheld,
and may have inadequate gross-ups. Companies who do not already do so may face
pressure to revisit gross-ups at year end for those transferees who consider
the gross-up inadequate.
Related: U.S. Treasury & IRS to Address State Tax Deduction 'Workarounds'