Connecticut and three other Atlantic states continued their battle Tuesday against federal income tax changes that punish states which voted against Donald Trump in the 2016 presidential election.
Attorney General William Tong and Gov. Ned Lamont announced the filing of an appeal in the U.S. Court of Appeals for the Second Circuit. This will enable Connecticut, New York, New Jersey and Maryland to continue their battle to overturn a cap on the deductibility of state and local income taxes on federal returns.
Congress capped the state and local income tax — or SALT — deduction to $10,000 during a massive federal tax overhaul in 2017. Critics say it will disproportionately harm states with high property tax rates and great wealth.
“The SALT deduction cap is a politically motivated tax hike that will cost Connecticut taxpayers $2.8 billion each year. We are aggressively pursuing this appeal and will continue to fight to protect our taxpayers from Trump’s discriminatory and abusive money grab,” Tong said.
“President Trump and Congressional Republicans raised taxes for millions of middle-class Americans – intentionally targeting people who live in states such as Connecticut – while at the same time cutting taxes for corporations and the rich,” Lamont added. “Federal tax laws should not be written based on who lives in ‘blue’ states and who lives in ‘red’ states.”
Voters in many of the states impacted by the SALT deduction cap, including the four that filed the appeal, supported Democrat Hillary Clinton in the 2016 presidential contest.
But supporters of the cap say it was the linchpin of a $1.5 trillion federal tax overhaul, which included cutting taxes for wealthy Americans and slashing the corporate tax rate.
The SALT cap went into effect for the 2018 tax year. The Trump administration has estimated it would leave filers unable to deduct $323.1 billion in state and local taxes from their 2018 returns.
Connecticut and the three other Atlantic states filed their initial lawsuit in U.S. District Court of the Southern District of New York last year. Federal Judge Paul Oetken ruled in September that the four states failed to show that the cap exceeded Congress’ broad taxing power or was unconstitutional.
Tuesday’s appeal keeps that case alive.
But Connecticut also has a second lawsuit pending regarding this issue.
The 2018 General Assembly and then-Gov. Dannel P. Malloy changed state tax laws in an attempt to cushion the blow of the federal SALT cap.
One change allows municipalities to provide a property tax credit to taxpayers who make voluntary donations to a “community-supporting organization” approved by the municipality. While the federal deduction for state and local taxes could not exceed $10,000, the rationale is that some or all of that payment also could be deducted from federal taxes as a “charitable donation.”
But the IRS responded by nullifying this relief, ruling such contributions could not be deducted on federal income tax returns.
New York and New Jersey, which enacted state tax changes similar to Connecticut’s workaround legislation, joined Connecticut in a second lawsuit filed in July to contest the IRS ruling.
This case is pending in the U.S. District Court for the Southern District of New York.