The governors of New York, New Jersey and Connecticut said Friday they are forming a multistate coalition to sue the Trump administration over the 2017 tax bill, challenging the constitutionality of a provision that limits Americans' ability to deduct their state and local taxes from their federal bill.
The law sets a new cap of $10,000 on the amount of state and local property and income taxes that can be deducted from federal taxable income. That will disproportionately harm their residents, the governors said in a conference call, and is motivated by politics rather than sound fiscal policy. All three governors, Andrew Cuomo of New York, Dannel Malloy of Connecticut, and Phil Murphy of New Jersey, are Democrats.
"The new federal tax law destroyed a century-old tax structure between the federal government and the states," Cuomo said on Twitter. "New York will sue."
Murphy said someone asked him if he was filing the case to make a symbolic point: "I said heck no. We believe substantively there is a very strong case and the more likeminded states who join us, I think the better our shot."
The lawsuit will be filed in federal court in the coming weeks, the governors said. They also said they are talking to other states about potentially joining the coalition.
In a statement, the White House dismissed the threatened suit. "This is a ridiculous, meritless publicity stunt by governors trying to blame the President for their high taxes and anti-growth policies," Raj Shah, principal deputy White House Press secretary, said.
"They should look to the Tax Cuts and Jobs Act, which at last count has led to more than 3 million workers — including employees at Verizon, Hartford Financial Services Group, and Jet Blue, which are headquartered in their own states — receiving bonuses, raises, additional benefits, or new jobs, as a model for how they can make their own states more affordable. Instead, they're wasting taxpayer money on frivolous litigation."
The curtailing of the state and local tax deduction was among the thorniest issues facing Republican lawmakers who pushed the legislation through Congress late last year. About 44 million Americans a year take advantage of the tax break to collectively save an estimated $60 billion.
Local leaders worried that curtailing the tax break would undermine their ability to raise money for government services, including police and schools. Without the offset, local leaders said, taxpayers are likely to begin to seek relief closer to home, potentially making it more difficult to provide basic services.
Malloy said, for example, that the majority of the money raised through property taxes in Connecticut go to fund education, and the federal government shouldn't have a role in that process. "This law does real harm to Connecticut taxpayers, who stand to lose over $10 billion in state and local tax deductions," he said. "In short, hundreds of thousands of residents could see a tax increase even as their property values decrease."
Malloy and the other governors said their states already send billions more in tax revenue to Washington than they receive in return.
"This is an assault on those states," said Malloy. "I believe it is illegal. It is why we are standing up and saying this can't happen."
A White House spokesperson did not immediately return an email seeking comment.
Conservatives have long complained that the deduction is a windfall for high-tax, liberal-leaning states at the expense of low-tax, conservative-leaning states. According to the conservative Tax Foundation, taxpayers in six states — California, Illinois, New Jersey, New York, Pennsylvania and Texas — claimed more than half of the dollar value of the deduction. Curtailing the tax deduction is projected to raise nearly $600 billion in federal taxes over 10 years, according to the Joint Committee on Taxation.
And legal experts have questioned whether the federal courts would seriously entertain striking down the law. Republicans articulated justifications for ending the state and local deduction beyond a simple attempt to punish liberal voters, some experts have said.
Curtailing the state and local tax deduction made the federal tax system more fair, not less, said Rachel Greszler, a research fellow at the Institute for Economic Freedom at the Heritage Foundation. Someone is high-tax states, such as New York or California, will now pay the same in federal taxes as those in low-tax states such as Tennessee and Texas, she said.
Among taxpayers making between $75,000 to $100,000 and who itemized their deductions, the average state and local deduction was about $7,200, said Greszler. Among those earnings making between $100,000 and $200,000, the average deduction was $11,100.
"Ten thousand is more than most people have deducted for state and local taxes," she said.
But in high-tax states the average was much higher, Greszler said, noting that it was $17,900 in New Jersey, $22,200 in New York and $19,700 in Connecticut.
"The cap is probably going to affect 15 percent of taxpayers, probably fewer," said Greszler. "The solution here is for them to lower their own [state and local] taxes."
Still, some states are plotting other strategies for bypassing the change in the law. "Just because we're taking aggressive legal action as a group of states doesn't mean that our creative juices and other alternatives will be ignored or shut back," Murphy of New Jersey said.
In California, a state Senate leader has introduced legislation aimed at circumventing that provision of the law and could potentially be replicated across the country. The bill would allow taxpayers to make a charitable donation to the California Excellence Fund instead of paying certain state taxes. They could then deduct that contribution from their federal taxable income.