DEMOCRATS FILE LAWSUIT TO REIMPOSE TAX DEDUCTION FOR THE RICH
By Kevin Ryan

New York, New Jersey, Connecticut, and Maryland filed a lawsuit last week to stop the new limit on deducting state and local tax from federal taxes. The Republican tax overhaul that passed late last year imposes a $10,000 cap on deductions for state and local taxes. States with high taxes had benefitted from the deductions because they acted as a federal subsidy that shifted wealth from low tax states to high tax states.

For example, New York could force a wealthy couple to pay $100,000 in state taxes, but that couple could then reduce the amount of their income subject to federal taxation by $100,000. If the couple’s average federal income tax rate was 35%, that meant they’d pay $35,000 less to the federal government. It was a boon to high tax states, acting as a federal subsidy and encouraging state and local governments to levy higher taxes. Meanwhile, states with low tax rates saw little benefit from the deduction.

But the new $10,000 limit suddenly exposes the rich in high tax states to the full impact of the high local taxation, which will likely motivate many to flee to lower tax states. That’s bad news for places like Connecticut, which are already suffering a mass migration of businesses and wealthy people who’ve been subjected to ever increasing local taxes.

The lawsuit argues that the $10,000 limit exceeds Congress’ taxing authorities and “deliberately seeks to compel certain states to reduce their public spending.” Experts on the issue believe otherwise.

Brian Galle, a professor of law at Georgetown University, said that the suit was “an original work of scholarship,” and “is probably not a winner.”

David Carl Kamin, a professor of law at New York University, concurred, saying that the courts had given broad discretion to Congress “on what deductions are allowed and not allowed,” citing the Alternative Minimum Tax. “It seems a situation in which the courts are unlikely, and probably shouldn’t, intervene.”

While it’s unlikely the high-tax states will win in court, there’s still one solution available to stop their residents from fleeing: cut taxes.

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