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Photo: Tom Williams/CQ Roll Call

Four northeastern states filed a federal complaint Wednesday about the cap on state and local tax deductions in the new tax bill, Forbes reports.

The bottom line: Connecticut, Maryland, New Jersey, and New York claim the cap will raise tax liability for millions of taxpayers. Because people living in these states pay high state and local tax rates, if they are no longer allowed to deduct as much money off their federal taxes, they may consider living elsewhere to avoid that tax burden.

The details:
  • Before the Tax Cuts and Jobs Act, there were no specific limitations on the amount of itemized deductions for state and local taxes.
  • Now, the amount taxpayers may claim on Schedule A for all state and local sales and income and property taxes combined may not exceed $10,000, or $5,000 for married taxpayers filing separately. That means individuals who pay high state and local tax can only deduct $10,000 from their federal tax.
  • In the past, only 30% of taxpayers decided to file itemized deductions instead of filing standard tax deductions, per the Internal Revenue Service. High-income households are more likely to itemize because they have more personal property.
The lawsuit
  • The states are suing the U.S. as well as Treasury Secretary Steven Mnuchin, IRS acting Commissioner David Kautter, the U.S. Treasury, and the IRS.
  • The plaintiffs argue the state and local tax cap increases the federal tax burden on taxpayers in targeted states.
  • The states also claim they will not be able to make policy decisions without federal interference, which will make it harder for them to maintain their taxation and fiscal policies — a direct violation of the Sixteenth Amendment.
  • Essentially, the states and several interest groups argue the new state and local tax cap could artificially depress home values.
  • The New York State Department of Taxation and Finance revealed that the cap will increase New Yorkers' federal taxes by $14.3 billion in 2018, and by $121 billion between 2019 and 2025, per a statement from New York Attorney General Barbara Underwood.

What to watch: The case will come down to interpretation of whether the deduction is a benefit or a constitutional right, Adam Beckerink, Tax partner at Morgan, Lewis & Bockius LLP told Forbes. "Many will be watching to see if other states join the suit and if the federal government will increase its scrutiny of the ‘workaround’ processes that were previously passed by the States."

Go deeper

"Atmospheric river" swings Northern California from drought to flood

Satellite view of the bomb cyclone swirling off the coast of the Pacific Northwest and the atmospheric river affecting California on Oct. 24. Photo: CIRA/RAMMB

A series of powerful "atmospheric river" storms are delivering historic amounts of rainfall across parts of drought-stricken California and the Pacific Northwest.

Why it matters: The atmospheric river, packing large amounts of moisture, was causing Northern California to whiplash from drought to flood, as it slowly moved south overnight. It's triggered widespread power outages, flooding and mudslides.

In photos: Drought-ravaged California lashed by major storm

Workers try to divert water into drains as rain pours down on Oct. 24 in Marin City, California. Photo: Justin Sullivan/Getty Images

A major storm system was pummeling Northern California and parts of the Pacific Northwest with heavy rains overnight.

The big picture: "Atmospheric river" storms, associated with a record-strong "bomb cyclone" offshore from the Pacific Northwest, have brought flooding and mudslides to parts of California that were razed by recent wildfires and in severe drought. It's also caused widespread power outages in California and Washington state.

4 hours ago - World

Sudan's military places civilian prime minister under house arrest

Sudanese Prime Minister Abdallah Hamdok during a 2020 news conference in Khartoum, Sudan. Photo: Mahmoud Hjaj/Anadolu Agency via Getty Images

Sudan's civilian Prime Minister Abdalla Hamdok was put under house arrest and several other ministers were also detained Monday in what appears to be a military coup in the country, per local reports.

Why it matters: The arrests of the civilian faction in the Sudanese government came a day after U.S. envoy Jeffrey Feltman met with the head of the military faction of the Sudanese government General Abdul Fattah al-Burhan and warned him against staging a coup.

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