New York Taxpayers Must Pay for Ill-Advised Lawsuit Seeking Tax Cuts for Wealthiest Residents

January 26, 2018

Today, New York Governor Andrew Cuomo (D) announced that New York, New Jersey, and Connecticut are going to court to make the federal tax code more regressive.

Appearing on MSNBC a few days after the federal tax reform bill passed in December, Cuomo slammed it as “a tax cut for the wealthy.” Now he’s spearheading a lawsuit claiming just the opposite and demanding additional benefits for the wealthiest taxpayers.

New York is forming a coalition with New Jersey and Connecticut to sue on (probably) equal protection grounds, arguing that capping the state and local tax (SALT) deduction at $10,000 unfairly and unequally targets taxpayers in certain states.

“This is an assault on those states,” said Connecticut Gov. Dannel Malloy (D). “I believe it is illegal.”

“It’s a very strong argument it’s a violation of the equal protections [sic] clause,” Cuomo added on a call.

But then Cuomo claimed that “[t]here is a very strong argument that the bill is a fundamental violation of states’ rights and repugnant to the very concept of federalism that formed this nation.” So maybe it’s a Tenth Amendment case? You don’t see many of those.

But Cuomo wasn’t done. “States are not colonies of the federal government,” he added. “Federalism was a covenant. It was shared power, and the federal government shall not trample the state’s powers,” espousing a view of federal tax powers scarcely heard for a century.

These claims don’t hold up under closer scrutiny.

The idea here is that capping the SALT deduction disproportionately impacts high-income earners (they’re the ones who earn enough to pay more than $10,000 in state and local taxes), and there are many high earners in New York, New Jersey, and Connecticut. Therefore, that provision is inequitable, because it “targets” wealthy states.

But the fact is that just about every major revenue or expenditure policy has disparate geographic effects.

Social Security and Medicare benefit the states with sizable retiree populations. Housing assistance, SNAP, TANF, and other assistance programs flow predominantly to states with lower-income populations. Defense spending benefits states with large military installations or those that are home to major defense contractors. Corporate income taxes fall most heavily on states which attract large corporations, while manufacturing incentives give advantages to states with manufacturing hubs. These outcomes are inevitable.

When top marginal rates rise, this disproportionately impacts states filled with high earners, but New York didn’t threaten to sue when the top rate rose under President Obama. The creation of the alternative minimum tax hit these states’ residents particularly hard, but in the nearly fifty years since its creation, no state has filed an equal protection lawsuit to abolish it. What about when capital gains rates rise? There’s a lot more capital gains income in New York than there is in, say, Wyoming—yet no lawsuits.

All this makes it difficult to identify the basis for such litigation. Had the Tax Cuts and Jobs Act created a surtax on states that voted a certain way, or a tax based on the states’ economic or demographic characteristics, that would certainly violate the equal protection clause—and raise other constitutional questions as well. But reducing the scope of a tax preference? The idea that this violates the equal protection doctrine defies belief.

All this assumes, of course, that the lawsuit is predicated on equal protection. That’s what they’ve indicated previously, but then again, maybe not:

“Alphonso David, Cuomo’s counsel, cautioned against speculating on the precise causes of action in the upcoming lawsuit, saying the precise legal claims are still being explored,” The Buffalo News reported.

That’s right: they’ve announced their intent to sue but they don’t yet know why. They feel confident that the SALT cap is illegal, but they don’t yet have a theory as to how.

The same politicians who decried “tax cuts for the rich” are now suing because the new tax law limits a tax break for the rich. Some of these states are also formulating desperate workarounds to the SALT deduction cap, but perhaps recognizing that they won’t work, they are also suing to make the tax code more regressive.

These states’ high earners already get the benefit of lower rates and broader bracket widths. Tax reform, by its nature, involves trade-offs, and at its core is a principle so basic as to be clichéd: broader bases and lower rates. That means that targeted incentives are curtailed to help bring down rates, and that’s precisely what happens with the capped SALT deduction. But now New York, New Jersey, and Connecticut want their high-income earners to receive the benefit of the new, lower rates and the old, uncapped SALT deduction, even though curtailing the deduction helps pay for that rate reduction.

This case will almost certainly fail, directing resources to a fruitless endeavor that forecloses more productive uses of taxpayers’ money.

For years, many of these same politicians claimed that tax rates don’t affect migration or economic decision-making. Now they’re willing to remake their tax codes and sue the federal government to shield their highest-income taxpayers from the consequences of their own high tax rates.

Their actions represent a “whatever it takes” approach to allowing wealthy residents to double up on tax benefits unavailable to others. A year ago, who would have guessed that such an effort would be spearheaded by officials in New York?

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