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Judge tosses lawsuit that challenged new federal tax law that limits deductions

The 2017 federal tax law limited how much of a federal deduction taxpayers could take for the state and local taxes they pay. Maryland and three other states tried to challenge the cap, but their lawsuit was dismissed by a federal judge on Monday.

A judge has thrown out a lawsuit from Maryland and other states that challenged part of President Donald Trump’s tax law that limited deductions taxpayers can take on their federal taxes for the state and local taxes they pay.

The cap, part of Trump’s 2017 tax reforms, led to residents of high-tax states such as Maryland paying more in federal taxes. One estimate predicted that half a million Marylanders would be affected.

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Maryland Attorney General Brian Frosh joined his counterparts in Connecticut, New York and New Jersey in filing the lawsuit last year, saying the cap “disrupts the longstanding balance of taxing power between the states and the federal government.”

A spokeswoman for Frosh, a Democrat, said he is “still reviewing the decision and assessing next steps.”

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New York Attorney General Letitia James, whose predecessor initiated the lawsuit, said in a statement she was considering options for the next move. She called the cap “an invasive and unprecedented attempt by the federal government to curtail our states’ constitutional rights.”

Before Trump’s 2017 tax reforms, taxpayers could claim a deduction on their federal taxes equal to how much they paid in state and local taxes, such as property taxes. The 2017 law capped the deduction at $10,000 for a single taxpayer or a couple filing jointly. A married person filing separately from their spouse was limited to a $5,000 deduction.

In states such as Maryland with high local taxes, that meant that taxpayers were losing out on deduction and paying more in federal taxes, the states argued in their lawsuit.

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They said the cap “eviscerates” the deduction, “overturning more than 150 years of precedent” that allowed taxpayers to take an unlimited deduction.

The states claimed that Trump and Republican lawmakers targeted Democratic-leaning states with this change. They asked the court to rule that the cap was unconstitutional and block the federal government from enforcing it.

The states also said that if taxpayers can no longer deduct their property taxes, it will make home ownership more difficult, driving down real estate prices. That, in turn, will generate less in state and local taxes that are based on property values, the states alleged.

The Trump administration sought to have the lawsuit dismissed, saying the states lacked standing to make their argument and failed to state a valid legal claim. The administration’s attorney contended that Congress has “broad authority” over income taxes and deductions.

U.S. District Judge J. Paul Oetken of New York found that the states did have the standing to sue but that the states didn’t cite any constitutional principles that would prevent Congress from capping the state and local tax deductions. Further, he did not find merit in the states’ argument that the cap was designed to force “certain disfavored, high-taxing states” to lower their taxes.

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Oetken wrote that the cap “is a part of the landscape of federal law within which states make their decisions as to how they will exercise their own sovereign tax powers.”

He granted the Trump administration’s motion to dismiss the lawsuit.


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