Four Democratic-leaning states suing the Treasury Department over new tax deduction rules are picking a fight they’re never going to win, federal lawyers said in new court papers.
New York, New Jersey, Connecticut and Maryland claim the federal government is overstepping its bounds with a new $10,000 deduction cap at the state and local level on combined sales, income or property taxes, but federal lawyers fired back in a dismissal motion filed Friday evening that Congress has always had “broad authority to enact taxes and set deductions.”
The dismissal motion in Manhattan Federal Court is the Trump administration’s first counter-punch on a July lawsuit challenging the deduction limit on state and local taxes.
The dismissal motion in Manhattan Federal Court is the Trump administration’s first counter-punch on a July lawsuit challenging the deduction limit on state and local taxes. The cap was one part of a 2017 tax overhaul that reduced individual and corporate tax rates. The deduction limit is in place through 2025.
The tax act raced through Capitol Hill last year and didn’t garner a single Democratic vote in the House of Representatives or the Senate. President Donald Trump signed the bill in December 2017.
The four-state coalition sued in the Treasury Department in July, asking Judge J. Paul Oetken to deem the cap unconstitutional. The state and local taxes deduction was previously unlimited.
Andrew Cuomo, the Democratic governor of New York, said Trump’s tax plan is a “political attempt to hurt Democratic states” and one that will disproportionately hurt New York. Last July, he told reporters, “It is totally repugnant and hypocritical of the fundamental conservative ideology which they preach — the limited federal government, respect state rights. This tramples on their own theory. And it is politically motivated.”
Federal government challenges taxpayers to sue for a refund
If taxpayers wanted to challenge the new deduction cap, the dismissal motion argued, they could just pay their taxes and sue for a refund themselves. There was no place for the states’ shaky arguments and end-run around tax collection, the filing said.
But it’s not like taxpayers are going to be all that aggrieved, federal lawyers estimated. They argued that the majority of residents would be paying fewer federal taxes given the lowered tax rates and larger standard deductions.
“Many taxpayers in these states who previously benefitted most from the [state and local tax] deduction are projected to have consistently lower tax bills due to the combined effect of the act’s many provisions,” federal lawyers said.
States argue new tax caps violate the 10th Amendment
The new limits on state and local taxes allegedly violated the 10th Amendment’s protections for the states.
When they filed their lawsuit, the four states argued the cap was a “purposeful invasion of the sovereign authority of a handful of states to determine their own taxation and fiscal policies without a compelling justification.”
Furthermore, the states contended the new limitations were meant to ram Republican tax philosophies down their throats.
The states’ lawsuit pointed to various pundit quips, as well as Treasury Secretary Steven Mnuchin’s own words. It invoked one October 2017 interview where Mnuchin said changes to deduction rules were meant to “send a message to the state governments that, perhaps, they should try to get their own budgets in line.”
On Friday, Justice Department lawyers said the lawsuit was quoting Mnuchin out of context. His comments “did not convey any view that it was intended to punish certain states, nor force them to enact different state laws or policies,” they wrote.
New tax caps will strip away much-needed funds
The four states lacked constitutional arguments and only had “their own policy preferences as to how much of a deduction they would like to have for their residents,” according to the dismissal motion.
The states worried the new limits would have ruinous ripple effects for them and their residents. For example, they were concerned the caps on property tax deductions would make it more expensive to own a home, sink real estate prices and strip away money that could go towards goods, services and state revenues.
Those were all just “derivative and speculative injuries,” federal lawyers said.
Outside observers say the new tax laws might not be wreaking the havoc that some feared. Last month, CoreLogic’s chief economist, Dr. Frank Nothaft, said so far he hasn’t spotted any housing market price plunge. At least, not yet.
A Treasury Department spokesman declined to comment beyond the filing. The states are scheduled to file their rebuttal arguments next month.
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Source : MTV
