The passing of the Tax Cuts and Jobs Act at the end of 2017 has had widespread impacts on taxpayers. One effect of this tax overhaul was the creation of a cap on state and local tax (SALT) deductions. The change limits the deduction taxpayers can take on state and local property, income and sales tax to $10,000. Under the previous law, this deduction was unlimited.
While a $10,000 deduction may sound like a lot, the cap is expected to cause a major tax increase—estimated at $36 billion for tax year 2018. This deduction is commonly used in Georgia and many other states nationwide.
Now several months after the new tax act became law, four U.S. states are suing over the SALT deduction cap. The states involved in the lawsuit—New York, New Jersey, Maryland and Connecticut—claim that the federal government’s implementation of the cap constitutes an unconstitutional intrusion on state sovereignty—as it obstructs states’ authority to set taxes and fiscal policies themselves.
The U.S. Department of Treasury is currently reviewing the complaint, which alleges that the cap will negatively impact states by:
- Lowering the prices of homes,
- Reducing local spending,
- Limiting job creation and
- Hindering economic growth.
The plaintiffs in the lawsuit also claim that the cap will put undue financial strain on states—making it difficult for them to pay for critical services such as hospitals, schools, infrastructure and emergency services.
Some states have begun designing workarounds to circumvent the new SALT deduction restrictions. However, the Department of Treasury has advised that it intends to develop regulations to prevent such workarounds from being used.