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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

6 hours ago - Politics & Policy

Kellyanne Conway's parting power pointers

Kellyanne Conway addresses the 2020 Republican National Convention. Photo: Nicholas Kamm/AFP via Getty Images

Kellyanne Conway has seen power exercised as a pollster, campaign manager and senior counselor to President Trump. Now that his term in office has concluded, she shared her thoughts with Axios.

Why it matters: If there's a currency in this town, it's power, so we've asked several former Washington power brokers to share their best advice as a new administration and new Congress settle in.

6 hours ago - Politics & Policy

GOP holdouts press on with plans to crush Cheney

Screenshot of emails to a member of Congress from individuals who signed an Americans for Limited Government petition against Rep. Liz Cheney. Photo obtained by Axios

Pro-Trump holdouts in the House are forging ahead with an uphill campaign to oust Rep. Liz Cheney as head of the chamber's Republican caucus even though Minority Leader Kevin McCarthy told them to back down.

Why it matters: What happens next will be a test of McCarthy's party control and the sincerity of his opposition to the movement. Cheney (R-Wyo.) is seen as a potential leadership rival to the California Republican.

Democrats aim to punish House GOP for Capitol riot

Speaker Nancy Pelosi passes through a newly installed metal detector at the House floor entrance Thursday. Photo: Drew Angerer/Getty Images

House Democrats plan to take advantage of corporate efforts to cut funding for Republicans who opposed certifying the 2020 election results, with a plan to target vulnerable members in the pivotal 2022 midterms for their role in the Jan. 6 violence.

Why it matters: It's unclear whether the Democrats' strategy will manifest itself in ads or earned media in the targeted races or just be a stunt to raise money for themselves. But the Capitol violence will be central to the party's messaging as it seeks to maintain its narrow majorities in Congress.

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