Anti-tax reform lawsuit a waste of time and money

Anti-tax reform lawsuit a waste of time and money
© Greg Nash

On Feb. 1, the Baltimore Sun reported that Maryland Attorney General Brian Frosh intends to join a lawsuit against the federal government in response to the new tax reform law. Maryland joins other traditionally “blue” states such as New York, New Jersey and Connecticut.

Unfortunately for taxpayers in these states (such as myself), this lawsuit wastes time and money on a hopeless — and misguided — cause.

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The lawsuit focuses primarily on the state and local tax (SALT) deduction. The SALT deduction enables taxpayers to deduct the value of state and local taxes from their federal tax bill. Under the new tax reform law, the value of the deduction is capped at $10,000.

 

Frosh and other attorneys general make the argument that equal protection provisions would be violated under the tax reform law, as high-tax, high-income states will be disproportionately affected by a cap on the SALT deduction.

Wealth certainly plays a factor in whether the SALT deduction affects a taxpayer: An analysis of tax data from the last available year, FY 2015, finds that a mere 3.5 percent of the benefits of the SALT deduction went to those with incomes below $50,000. With the newly doubled standard deduction, this percentage will drop even further.

Yet, the idea that tax policies must affect each state equally is laughable. As Jared Walczak of the Tax Foundation points out, corporate income taxes primarily affect corporate hubs, while manufacturing tax credits benefit primarily states with a large manufacturing presence.

The impact of a federal tax policy on different states will necessarily depend on the demographic variances between the states in question. Frosh and his compatriots will have a difficult time arguing that the SALT deduction is somehow different from all the other elements of the tax code that get reshuffled on an annual basis.

The attorneys general also seem to have overlooked a cap on the SALT deduction that already existed before the new tax law. This precedence further undermines the logic of their case.

The Alternative Minimum Tax (AMT) — added to the tax code in 1969 to make sure that wealthy individuals are not able to use credits and deductions to eliminate their tax liability — already had the effect of a cap on SALT deduction.

Wealthy taxpayers are able to get less of a benefit from the SALT deduction because the AMT exists, yet the AMT has hardly been thrown out by courts for having this effect.

Perhaps most significantly, there is a clear distinction between Congress assessing a targeted tax on individuals from states that have certain economic characteristics and Congress limiting a broad deduction it was under no obligation to provide in the first place.

The Supreme Court has ruled on multiple occasions that federal tax deductions are a matter of “legislative grace,” completely up to Congress to decide whether to impose or retract.

Given the frivolity of the lawsuit, why are top government figures such as Frosh prepared to waste taxpayer money to tilt at windmills? One answer is likely the chance to score political points.

Attorneys General in Maryland, as in other states leading the charge such as New York, New Jersey and Connecticut, are elected, and thus incumbents have an incentive to push a lawsuit to attack an unpopular Trump administration.

The SALT deduction has the effect of cushioning wealthy residents of high-tax states from realizing the full impact of their state and local tax bills, as they can simply be deducted on federal taxes. Capping the SALT deduction lessens this generous subsidy being extended to states.

An uncapped SALT deduction overwhelmingly benefits higher-income taxpayers, and limiting it requires “blue states” to impose some fiscal discipline — hence the sudden urgency to protect the interests of higher-income taxpayers.

Taxpayers in the states in question should not be forced to fund a frivolous and unwinnable lawsuit. Maryland’s own governor, Larry Hogan, when asked about the lawsuit’s odds of success, replied, “I don’t think it has much of a chance.”

A tax change that will incentivize high-tax states to reduce their tax burdens should be celebrated, not futilely attacked.

Andrew Wilford is an associate policy analyst with the National Taxpayers Union Foundation, the research arm of the right-leaning National Taxpayers Union. Follow him on Twitter @PolicyWilford.