New Jersey is now the fourth state to sue over the $10,0000 cap on the federal tax deduction for state and local taxes.
The SALT deduction cap is "an unprecedented and harmful change to the federal tax code, Attorney General Gurbir Grewal said in announcing that the state would join New York, Connecticut and Maryland in suing the Internal Revenue Service and the Treasury Department to have the cap deemed invalid.
“What the Trump Administration enacted with the SALT deduction cap was nothing more than a tax hike on our working and middle-class families and seniors,” Gov. Phil Murphy said, in support of the action.
“I made a commitment to New Jerseyans to provide long-term property tax relief when I signed legislation to preserve deductibility by enabling municipalities to create charitable funds. We will continue to fight to protect local taxpayers and businesses.”
Previously, taxpayers who itemized their deductions could deduct from their federal tax liability all money paid for state and local income, property and sales taxes. But under the code enacted last year, that is now limited to just $10,000 for those taxes.
“Today we are making good on our promise to fight for New Jersey taxpayers – by taking legal action to protect our residents and restore fairness to the tax code,” Grewal said. “Simply put, the federal government violated the constitution when it imposed new, arbitrary limits on the amount of state and local taxes that residents could deduct on their federal tax returns.”
The lawsuit filed Tuesday notes that the deduction on individual federal tax liability has historically been recognized by Congress as essential under the Constitution.
“A SALT deduction has been a part of every federal income tax law since the first federal income tax was enacted in 1861,” the complaint explains.
The lawsuit adds that the SALT deduction is necessary to prevent federal taxes from interfering with each state’s right to determine its taxation and fiscal policies, because federal taxes crowd the states out of traditional revenue sources like income, property and sales taxes.
Calling the cap a drastic decision, the suit claims it will significantly increase the federal tax liability for residents of each of the plaintiff states.
Homeowners who could once deduct the full cost of their local property taxes now can only deduct a fraction of those taxes. That will increase the cost of owning a home, which in turn will depress home values.
The move deliberately targeted these states, the suit claims.
It notes that Treasury Secretary Steven Mnuchin said, the point of the changes to the SALT deduction was to “send a message to the state governments” that Washington wants them to change their spending policies.
