U.S.

Democrats in Four States File a Misguided Lawsuit against the Tax-Reform Law

New York Governor Andrew Cuomo at Trump Tower, January 2017 (Stephanie Keith/Reuters)
In effect, they would divert $650 billion to the super-rich.

Just when you thought politics in 2018 could not get any more bizarre, four states are now suing the federal government in hopes of mandating a $650 billion tax cut, of which 57 percent would go to the richest 1 percent of families. Rather than push for conventional legislation, the states are asserting that the U.S. Constitution requires this tax cut for the rich. One other thing: The lawsuit was filed by Democrats, not Republicans.

Specifically, the attorneys generals of New York, New Jersey, Connecticut, and Maryland have filed suit in federal court, arguing that the recent tax reform’s capping of the state and local tax (SALT) deduction at $10,000 per filer violates the Constitution. The lawsuit, a pure publicity stunt, is so frivolous and unserious it may as well have been written in crayon.

But don’t take my word for it. Even the AGs’ fellow liberals at ThinkProgress have called this “one of the stupidest lawsuits of the Trump era.” University of Iowa law professor Andy Grewal wrote, “If this lawsuit succeeds, I will post a video of myself eating every single page of the Internal Revenue Code, one-by-one.”

Before diving into the lawsuit, let us step back and acknowledge the bizarre politics at play. Throughout 2017, Democrats savaged the Republican push for “tax cuts for the rich.” Dozens of liberal organizations formed a group called “Not One Penny” to fight all upper-income tax relief. Eventually, the GOP enacted the Tax Cuts and Jobs Act (TCJA), which more or less cut taxes across the board. The TCJA even made the federal tax code slightly more progressive, by raising the estimated share of 2019 taxes paid by million-dollar earners from 19 to 20 percent.

How could the tax cuts slightly add tax progressivity? Because although nearly all families benefited from lower tax rates, the wealthy families who received additional benefits, such as relief from the Alternative Minimum Tax (AMT), were also hit with provisions such as capping the deduction for state and local taxes (SALT) at $10,000 per filer. Given that 96 percent of all SALT benefits above that $10,000 level go to the top 20 percent of earners, and that 57 percent of those benefits go to the richest 1 percent, this cap represented a straightforward way to ensure that the rich did not disproportionately benefit from the rest of the TCJA.

Repealing the new SALT cap would make the TCJA more expensive by $650 billion, and overwhelmingly tilted toward the rich. The annual tax-cut savings for New York’s richest 1 percent would rise from $24,000 to $82,000 per family. Nearly all families outside the richest 20 percent would receive literally nothing. If Republicans announced a new tax cut that audacious, there would be marches in the streets. MSNBC anchors would attack the new gilded age, and the New York Times would once again tweet out the phone numbers of GOP lawmakers, urging readers to voice their opposition.

Before tax reform, a $1 increase in a family’s state income taxes or local property taxes would, if they itemized their taxes, reduce their federal taxes by as much as 40 cents.

Yet this lawsuit, seeking to blow up the deficit in order to line the pockets of millionaires, was filed exclusively by Democratic governors and AGs (Maryland’s Republican governor Larry Hogan did not join the state’s Democratic attorney general in the suit). Their motivation is no mystery. While SALT directly subsidizes the rich, it indirectly encourages wealthy states to expand government.

Before tax reform, a $1 increase in a family’s state income taxes or local property taxes would, if they itemized their taxes, reduce their federal taxes by as much as 40 cents. Governors of wealthy states with a lot of tax itemizers could go on tax-and-spending benders and dump much of the added costs onto Washington. By one estimate, SALT helped state and local governments to expand as much as 20 percent larger than taxpayers would have allowed without Washington’s bribes.

The TCJA ended this free lunch by capping the SALT deduction at $10,000 per filer. The vast majority of taxpayers at all incomes still received a net tax cut, yet governors and mayors recoiled at losing their tool to sell higher state and local taxes. And in 2018, merely expressing opposition through conventional politics is passé. Today, citizens harass political opponents at restaurants, and one administration official was even treated to a burned animal carcass on his porch, while attention-seeking politicians smear their own country on foreign soil and clutter federal courts with frivolous lawsuits.

Which brings us to the publicity stunt that is New York et al. v. Mnuchin. This lawsuit has no chance to prevail. But it is not intended to prevail. Its purpose is to provide Andrew Cuomo and other Democratic governors with a new applause line in their speeches while glossing over the fact that the lawsuit alleges that the TCJA did not go far enough in benefiting the wealthy or adding to the debt.

The lawsuit reads more like a partisan rant than a coherent legal analysis. It angrily quotes the speeches of Republican lawmaker, as well as National Review’s own Ramesh Ponnuru, and sneers at the legitimacy of a tax law enacted by “a bare congressional majority of one party.” The words “Republican” and “GOP” appear a combined 38 times. The constitutional argument, to the extent one can find it, rests on three dubious assertions:

First, that capping the SALT deduction violates the Tenth Amendment by “interfering with the States’ sovereign authority” to set their own tax policies, and by starving states of tax revenue. Yet this federal policy does not directly limit state tax policy in any way. Furthermore, states that have aligned their tax codes with the federal tax code are seeing higher tax revenues because the paring back of federal deductions increases the base of taxable income at a given state tax rate.

Yes, paring back SALT may make it more difficult for governors to win public support for state tax increases. Yet virtually every federal economic policy affects state budgeting in some way, whether it’s subsidizing state Medicaid spending or distributing federal gas-tax revenues. In fact, one could argue that federal tax cuts mean that these governors’ constituents can now afford higher state taxes. None of this has anything to do with the Tenth amendment. Relatedly, the lawsuit’s claim that capping the SALT deduction is somehow unconstitutional because it may slow the growth of house prices (owing to its limits on property-tax deductions) is simply laughable.

Second, the lawsuit alleges that capping the SALT deduction at $10,000 — the provisio is applied equally to every taxpayer in every state — nonetheless singles out state such as New York for disproportionate harm and therefore somehow violates the Constitution. In reality, it replaces these states’ unfair advantage with a more level playing field.

Historically, wealthy states with high taxes disproportionately benefited from the SALT deduction because of their large number of tax itemizers receiving the maximum 40 percent tax deduction for their exorbitant state and local taxes. Capping the SALT deduction at $10,000 better equalizes the benefits of the deduction across the country.

These four wealthy states — New York, New Jersey, Connecticut, Maryland — complain that their residents send more taxes to Washington than many other states. But the typical New Yorker pays higher federal taxes than the typical West Virginian because of higher incomes and America’s system of progressive taxation, not because the new SALT cap treats them any differently. If wealthy New York Democrats believe that the federal tax code is too progressive, they are free to reconsider their congressional votes come November.

Residents of New York, New Jersey, Connecticut, and Maryland should feel embarrassed and ashamed of their state governments’ hijacking of the federal court system for a legally incoherent publicity stunt.

Finally, the lawsuit asserts that the 16th amendment, which made possible the modern version of the federal income tax, also mandates a full deduction for state and local property taxes. Of course, the 16th Amendment says nothing whatsoever about SALT or any specific tax preference. So the states claim that the SALT deduction has been part of the tax code for so long that it should be considered part of the 16th Amendment. In fact, going back to pre–16th Amendment taxes, the states argue that last year’s capping of the SALT deduction illegally “reversed over 150 years of precedent” in federal tax policy.

This inexplicably confuses a legislative precedent with a judicial precedent. The states are basically asserting that it is unconstitutional for one Congress to change the tax laws established by an earlier Congress. In other words, it is illegal for lawmakers to make laws. Any first-year law student offering such an argument would likely be invited to consider a different occupation.

Furthermore, the SALT deduction has not been a universal policy since at least the 1940s. The 70 percent of families who take the standard deduction do not receive a direct SALT deduction. Nor do the millions of tax itemizers subject to the AMT. The claim that a universal SALT deduction has always been legally untouchable fails constitutional law, tax law, and economics.

Residents of New York, New Jersey, Connecticut, and Maryland should feel embarrassed and ashamed of their state governments’ hijacking of the federal court system for a legally incoherent publicity stunt. Democratic voters should question how their party can rail against budget-busting “tax cuts for the rich” while trying to impose a new $650 billion tax cut almost exclusively for the super-wealthy. And the rest of us should ponder how to bring basic adult supervision back to our juvenile, petty, and silly politics.

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