Four Democratic States File Legally Dubious Lawsuit Against New Tax Law

New York and several other states have filed an incredibly dubious lawsuit against the Republican's new tax law.

New York and four other states have filed what can only be described as a bizarre lawsuit against the tax reform law passed by Congress last December, alleging that the changes to the deductibility of state and local taxes somehow violates the Constitution:

ALBANY — Four states including New York and New Jersey sued the federal government on Tuesday over a sharp reduction in the deductibility of state and local income taxes, a central part of President Trump’s tax overhaul, saying that the change was an “unconstitutional assault” on their sovereignty.

The suit, filed in Federal District Court in Manhattan, had been promised for months, as Democratic leaders of several states denounced the president’s plans, including Gov. Andrew M. Cuomo, who had called the limits on such deductions an “economic missile” at the heart of New York, already a high-tax state, and its economy.

On Tuesday, Mr. Cuomo reiterated that criticism and rhetoric in a news conference, saying that the Republican-backed plan is an “attempt to hurt Democratic states.”

“It is totally repugnant and hypocritical of the fundamental conservative ideology which they preach — the limited federal government, respect state rights,” said the governor, a second-term Democrat seeking re-election in the fall. “This tramples on their own theory. And it is politically motivated.”

The legal argument leans on interpretations of the 10th amendment — states’ rights — and the 16th, which established federal powers of income taxation, arguing that the new law effectively overturns longstanding precedent that “the federal government’s income tax power was and would remain subject to federalism constraints,” according to the suit.

It also argues that the limits on the deduction, and the potential economic damage as a result of its implementation, “deliberately seeks to compel certain states to reduce their public spending.”

The suit is the most substantive salvo in Mr. Cuomo’s monthslong campaign against any change in the so-called “SALT deduction” on state and local income taxes, as well as property taxes. Such deductions had typically been revered in states with high property taxes — like New York, New Jersey and Connecticut, all plaintiffs in the suit, along with Maryland — because of the tax relief it provided as well the incentive for homeownership.

Mr. Trump’s tax plan, signed in December, places a limit of $10,000 on combined income, sales or property taxes.

Whether the suit will find a receptive audience in the federal courts — or on a conservative-leaning Supreme Court — is an open question. Brian Galle, a professor of law at Georgetown University, said that the suit was “an original work of scholarship,” basically arguing that when the federal government imposed taxes, it had to reduce the collateral impact on a state’s ability to raise its own funds.

“The complaint is not frivolous, it is not crazy,” Mr. Galle said. “It is also probably not a winner.”

David Carl Kamin, a professor of law at New York University, concurred, saying that the courts had given broad discretion to Congress “on what deductions are allowed and not allowed,” citing the Alternative Minimum Tax.

“I think the policy is poorly designed for a number of reasons, and I think Congress should revisit it,” he said of the tax law. “But it seems a situation in which the courts are unlikely, and probably shouldn’t, intervene.”

As noted above, the Complaint is centered around those provisions of the new tax law that placed limits on the ability of taxpayers t0 deduct their state and local taxes from their taxable income. Under the law prior to the Tax Cuts and Jobs act, taxpayers could generally deduct both their property taxes and either their state income taxes or what they paid in sales tax. The new law caps that deduction at $10,000. The impact of the new law will largely only be felt by the one-third of taxpayers who itemize their deductions, most of whom are high-income earners. The Complaint, though, ignores the income-based impact of the change and concentrates on the fact that the impact of the cap will be felt most harshly by high-income earners in states that also have higher tax rates, the majority of which, of course, tend to be controlled by Democrats. Based on that, the lawsuit then goes on to claim that this would somehow violate the supposed sovereign authority of the states and thereby violates established principles of Federalism. The Complaint then goes on to allege that the full deductibility of state and local taxes ”is essential to prevent the federal tax power from interfering with the States’ sovereign authority to make their own choices about whether and how much to invest in their own residents, businesses, infrastructure, and more.”

Based on these facts, the Complaint makes a series of arguments, none of which make any sense once they’re subjected to even a small bit of scrutiny.

To start with, the Complaint argues that the cap on deductibility of state and local taxes is unfair due to the fact that it imposes a higher tax burden on states with high rates of taxation than it does in states with lower tax rates, or states that do not have an income tax at all. This allegedly violates the Tenth Amendment due to the fact that it violates the requirement that Amendment places on the Federal Government to respect the “equal sovereignty of the states. A second count of the Complaint essentially repeats the claims of the first in that it argues that the deductibility limit established by the new law singles out states that have used the authority granted them under the Constitution to adopt higher tax rates to fund public investments. Next, the Complaint states that since Congress has provided a deduction for “all or a significant portion” of state and local tax law in each Federal Income Tax law adopted since the ratification of the Sixteenth Amendment roughly 100 years ago and claims that it is unconstitutional to break with this tradition notwithstanding the fact that there is nothing in the Sixteenth Amendment or any other provision of the Constitution that requires that Congress adhere to this policy. Finally, the Complaint adopts a bizarre argument that seemingly ignores the text of the Constitution entirely. In this argument, the Complaint contends that the cap on deductibility of state and local taxes places a greater burden on the residents of high-tax states and is therefore unconstitutional because it is not apportioned equally among the states.

Think Progress’s Ian Millhiser is not impressed, calling the lawsuit “one of the stupidest lawsuits of the Trump era:”

None of these arguments make sense. Starting with the historic argument, it simply is not true that past Congresses “provided a deduction for all or a significant portion of all state and local taxes in every federal income tax law since the adoption of the Sixteenth Amendment.” Recall, first of all, that only one-third of taxpayers itemize their deductions. That means that about two-thirds of federal taxpayers did not receive a SALT deduction even though nearly all of them would have paid state or local taxes.

Moreover, many upper income earners pay the “Alternative Minimum Tax,” a mechanism intended to prevent relatively wealthy taxpayers from stringing together a long list of deductions to reduce their tax burden below a certain level. Taxpayers who pay the AMT are not eligible for the SALT deduction.

The universe of taxpayers who actually receive a SALT deduction, in other words, is only a small fraction of all federal taxpayers. That hardly amounts to a “deduction for all or a significant portion of all state and local taxes.”

The New York complaint’s suggestion that federal tax policy cannot be used to encourage states to change their own tax policies is also incorrect.


Literally any change to federal tax policy will, at least on the margins, impact state tax policy. If the federal government reduces the mortgage interest tax deduction, for example, that will diminish the price of homes and reduce what states can collect in property taxes under their existing laws. If the federal government eliminates a tax benefit for hybrid car owners, that will reduce automobile sales and cause states to collect less money in sales taxes.

There is no such thing as a change in federal tax policy that does not, in some way, encourage states to change their own tax policies if they want to keep the amount of revenue they are collecting constant.

[Additionally, the] “equal sovereignty” claim largely boils down to a complaint that the $10,000 cap imposes greater burdens on taxpayers from some states than on others. “Taxpayers in the Plaintiff States will pay a substantial portion of the increase in
federal taxes generated by the new cap on the SALT deduction,” the lawsuit claims. “Imposing such inequality on the States,” the complaint continues, violates “the basic promise of the Constitution: the States have equal sovereignty under the law.”

The claim here, in other words, is that the $10,000 cap is somehow unconstitutional because its effects are not apportioned equally among the states.

There actually was a moment in American history when this would have been a pretty strong claim. Article I of the Constitution distinguishes between “direct” taxes, which must be “apportioned among the several states,” and indirect taxes, which are not subject to this apportionment requirement. Under this regime, if New York has 8 percent of the population, then any “direct” tax must be structured so that exactly 8 percent of the revenue collected by the tax comes from New York.

The Supreme Court’s 1895 decision in Pollock v. Farmers’ Loan and Trust Company held that a federal income tax counted as a “direct” tax, and therefore was unconstitutional because it wasn’t apportioned. If Pollock were still good law, then the four attorneys general behind New York would have a really strong argument.

But Pollock is not good law. It was overruled by the Sixteenth Amendment to the Constitution. The lawyers behind the New York lawsuit literally could have figured out that their argument is trash if they had bothered to read the Sixteenth Amendment’s Wikipedia page.

The Volokh Conspiracy’s Ilya Somin is similarly dismissive:

The states point to various statements by framers and ratifiers of the Sixteenth Amendment indicating that the Amendment was not intended to impinge on the rights and powers of state governments. But none of these statements indicate that the federal government was required to create an exemption for state and local tax payments. The absence of such an exemption in no way diminishes states’ powers to raise their income taxes as high as they want, although it might, of course, increase political resistance to high state tax rates.

It is also notable that the four states stop short of claiming that all state tax payments must be exempted, and merely claim that a “significant portion” must be. It is hard to say what qualifies as a “significant portion,” and the states fail to explain why $10,000 isn’t “significant” enough. Even among affluent taxpayers with incomes over $100,000 per year, the average claimed SALT deduction (among those who claimed it at all) was only $12,300 in 2014. The new cap of $10,000 sure seems like a “significant portion” of that, at least to me. And, of course, few if any taxpayers with incomes below $100,000 are likely to exceed the cap.

The states also argue that the new law undermines “equal sovereignty” of states because it disproportionately hits blue states with relatively high income tax rates. This disproportionate effect is surely present. But similar disproportionate impacts occur with pretty much any tax deduction formula. The very existence of the SALT deduction negatively affects poorer states and those with lower state tax rates, because it forces them to bear a higher proportion of the total federal tax burden. In a diverse nation with states that have a wide range of policies, almost any federal tax deduction will disproportionately benefit some states at the expense of others.

Admittedly, blue states are not the only ones who have advanced extremely dubious arguments in recent litigation against federal policies. Badly flawed as they are, the blue state claims in the SALT case are probably no worse than the ridiculous severability argument advanced by twenty red states (and now, also, the Trump administration) in the currently ongoing Obamacare case. But the bad behavior of many red states and Trump does not justify that of these blue states (or vice versa).

Both of these critiques are spot-on.

If the argument that the Plaintiff states are making here were accepted by the Courts, which I doubt it will be, then it would essentially mean that Congress can never change Federal Tax Law. Once it passes a law that includes a deduction or tax credit, or a tax credit or subsidy, then it cannot remove or change those provisions of the law due to the fact that some individuals and states have acted in reliance upon existing law. This goes against every principle of legislation that the law has been based on since the Constitution was adopted, and as long as Congress is acting in a manner consistent with its authority under the Constitution then it can make any change to existing law that it chooses. For example, for several decades most taxpayers were able to deduct most if not all of the interest they paid not only on their mortgage but also on personal loans such as car loans and credit cards. That deduction was removed in 1986 notwithstanding the objections of the banking industry and some consumer groups. Under the theory advanced by the states, that a change in the law was unconstitutional, an argument that is, of course, ridiculous.

While there are four states that are party to this lawsuit, the primary momentum for this litigation is clearly coming from Andrew Cuomo, the Governor of New York, who happens to be up for re-election this year. While Cuomo is essentially assured of a victory in both the September Democratic Primary and the General Election, he has also spent the better part of his campaign moving subtly to the left in an effort to shore up support among the progressive wing of the Democratic Party. Many observers have taken this as a sign that the Governor is considering a run for President in 2020, something he has passed on before. In this case, the lawsuit serves the purpose of both doing that and sticking a thumb in the eye of President Trump, which will no doubt play well in a blue state like New York. Viewed in that light, the fact that the lawsuit is legally meritless isn’t quite as relevant.

In any case, I would not expect this lawsuit to get much traction, even before a Democratic-appointed Judge.

Here’s the Complaint:

New York Et Al v. Mnuchin Et Al by Doug Mataconis on Scribd

FILED UNDER: Congress, Donald Trump, Law and the Courts, Politicians, Taxes, U.S. Constitution, US Politics, ,
Doug Mataconis
About Doug Mataconis
Doug holds a B.A. in Political Science from Rutgers University and J.D. from George Mason University School of Law. He joined the staff of OTB in May 2010. Before joining OTB, he wrote at Below The BeltwayThe Liberty Papers, and United Liberty Follow Doug on Twitter | Facebook


  1. tm01 says:

    Democrats are arguing for lower taxes on the rich.
    Democrats are arguing for Federalism (however frivolously).
    Democrats are even chanting USA in Congress!

    Is there anything Trump can’t do?

    Of course, they should have filed this in the 9th Circuit somewhere. Then when they won there you’d see all kinds of “Trump Still Not Winning!” headlines all over the place.

  2. @tm01:

    And Republicans are rallying behind a man who is cowering to a former KGB agent and cozying up to dictators in Turkey, Egypt, China, North Korea, The Philippines, and Russia while trashing out longtime allies in democratically elected nations.

  3. Just nutha ignint cracker says:

    The front page noted a comment that doesn’t seem to be here. Was Bunge the first poster?

    I would be gobsmacked, but this seems to me to be one of those “if Republicans can do this to OUR PRESIDENT, we’ll show them we can do it to THEIRS” things that I’m really surprised that we’re not seeing more of. Ah, mindless partisanship… as Yakov Smirnoff would say “what a country you have!”

  4. Just nutha ignint cracker says:

    (note to self: Remind Doug that the comment thread seems to be turned off.) ETA: Never mind. I’m just experiencing that stuff disappearing thing that everyone has been talking about.)

  5. TM01 says:

    @Doug Mataconis:
    Trump has everyone in an interesting place. We need Russia’s help in many locations. Nk, Syria, middle East. Cozy up to him in public, offer to make him one of history’ legends.

    Can you imagine Putin holding a press conference, with Trump and Kim Jung un either side of him, announcing a nuclear deal?

    OTOH, if Putin does screw over Trump somewhere, Trump will have 100% of the American public’s support in going full in after Russia. Be it sanctions, cyberwarfare, stopping that pipeline, etc.

    You guys are already committed to war with Russia. It’d be pretty easy to get the other half of the country on board with that.

    That sounds like some pretty good leverage over Putin.

    The last variable is Putin recognizing what’s best for him and Russia.

  6. tm01 says:

    @Doug Mataconis:
    I’m old enough to remember when Our President trashed our relationship with our longtime ally of Israel and cozyed up to dictators in Cuba and Iran. Oh, and Russia.

  7. @TM01:

    You really don’t have any idea what you’re talking about, do you?

    In any case your comment is outside the scope of the subject matter of this post, which is, as you may be aware, a violation of our comment policies. Please keep your comments to the subject matter of the post in the future rather than engaging in what seems to me to clearly be an effort to troll the other people who comment here.

  8. Michael Reynolds says:

    I’d heard that there were people out in the jungle somewhere who still believed Trump is playing n-dimensional chess. Like those Japanese soldiers who were still in the jungles of the Philippines in the 70’s and who were certain the Emperor wanted them to fight on.

  9. @tm01:

    The Idea that Obama trashed Israel is a complete lie whose untruth can be demonstrated by the fact that American military aid to Israel increased significantly more under the Obama Administration than it did under George W. Bush, by the fact that the Obama Administration stood shoulder-to-shoulder with Israel during the Hamas War, and, well, by anyone conversant with reality.

    As for Iran, there was no cozying up. During the Obama years, we imposed the toughest economic sanctions against the Islamic Republic that any American President had ever imposed and we rallied our European allies, Russia, China, and the United Nations to follow suit. These sanctions are what brought the Iranians to the table in Geneva for the talks that led to the Joint Comprehensive Plan of Action (JCPOA), otherwise known as the Iran nuclear deal. Contrary to the nonsense from the far right wing in the United States, which cares more about kissing up to Bibi Netanyahu than it does the national interests of the United States, that deal was quite strong and includes stringent verification provisions that, according to our allies and the International Atomic Energy Association (IAEA), Iran was complying with before Trump foolishly withdrew the United States from the deal despite the fact that his own foreign policy team was telling him not to do it.

    With respect to Cuba, the Obama Administration helped bring an end to an isolation that had been in place for fifty-plus years which lost its relevance when the Cold War ended. It was the right thing to do and, again, the inexperienced fool in the Oval Office has no understanding of what he’s doing as he tries to reverse those long overdue changes.

    Now, again, I remind you that you are far afield of the subject matter of this post. Either keep your comments relevant to the subject matter of this post, or risk the possibility that they will not appear in public.

  10. Guarneri says:

    Bizarre lawsuit is an apt description.

  11. Grewgills says:

    The lawsuit is political theater. It will fail in court, but it might succeed elsewhere.

  12. tm01 says:

    @Doug Mataconis:

    And Republicans are rallying behind a man who is cowering to a former KGB agent and cozying up to dictators in Turkey, Egypt, China, North Korea, The Philippines, and Russia while trashing out longtime allies in democratically elected nations.

    Off topic much?

    This whole suit is about Democrats fighting for lower taxes for the rich and wanting to keep their crappy, destructive policies at the state level.

    As I said. Before you changed the subject.

    Otherwise more of the rich, because they have the means to do so, will move away from the crappy states.

    They’re still bound to find a judge that sides with them tho. Because Resist and all that.