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07/17/2018

Gov. Malloy, AG Jepsen: Connecticut Joins Lawsuit to Protect State Taxpayers from Drastic Cut in State and Local Tax Deduction

Lawsuit Details How New Federal Tax Law Targets – and Will Disproportionately Harm - Connecticut and Similar States, While Interfering with States’ Rights to Make Own Fiscal Decisions

(HARTFORD, CT) – Governor Dannel P. Malloy and Attorney General George Jepsen today announced that Connecticut has joined a lawsuit to protect the state and its taxpayers from Washington’s drastic curtailment of the State and Local Tax (SALT) deduction.

The lawsuit, filed this morning in the U.S. District Court for the Southern District of New York, argues that the new SALT cap was enacted to target Connecticut and similarly situated states, that it interferes with states’ rights to make their own fiscal decisions and that it will disproportionately harm taxpayers in these states.

"President Trump's repugnant tax cuts gave massive handouts to the wealthiest one percent and stuck middle class taxpayers with the bill," Governor Malloy said. "Despite massive economic promises from Republicans, real wages have actually decreased since the passage of the tax cut. At the same time the deficit has exploded by $1.5 trillion, providing a convenient excuse for GOP lawmakers to pursue their longtime goal of gutting Medicare, Medicaid and Social Security. Perhaps most concerning, this law discriminates against Connecticut taxpayers, who stand to lose over 10 billion dollars in state and local tax deductions. Hundreds of thousands of residents could see a tax increase even as their property values decrease. I am proud to stand with my colleagues across the country in fighting against the discriminatory impacts of this shortsighted and damaging Republican law on our states."

"My office will continue to work with other states to vigorously oppose actions by the Trump Administration that disproportionately harm Connecticut and its residents," said Attorney General Jepsen.

The 2017 federal tax law, which resulted from a hyper-partisan and rushed process, drastically reduced the deduction by capping it at $10,000. The cap will cause Connecticut taxpayers to lose an estimated $10.3 billion in SALT deductions in 2018, and will increase Connecticut taxpayers’ federal income tax liability by approximately $2.8 billion in 2018. As set forth in the complaint, the law flies in the face of centuries of precedent, which establishes constitutional limits on the federal government’s ability to use its tax power to interfere with the sovereign authority of the states.

For the entire history of the United States, every federal income tax law protected the sovereign interests of the states by providing a deduction for all or a significant portion of state and local taxes. This uninterrupted history demonstrates that the unprecedented cap on the SALT deduction is unconstitutional, as the lawsuit notes.

This new, drastic curtailment of the SALT deduction has both the purpose and effect of harming Connecticut and other similarly situated states and their residents. Among other things, the new cap will depress home prices, spending, and business sales, and result in slower growth for the Connecticut economy and fewer jobs.

Among the other evidence cited in the complaint:

  • Policymakers openly talked about coercing states like Connecticut to change their policy choices. Treasury Secretary Steve Mnuchin said that the change was intended to “send a message” to states to get them to change their taxation and fiscal policies. Stephen Moore, who advised the Trump campaign on tax policy, said it even more bluntly, calling the SALT changes “Death to Democrats.”
  • The new provision will raise billions of dollars in federal taxes from Connecticut and others in similarly situated states.
  • By depressing home values, the new provision will hurt taxpayers in Connecticut and other states, while also reducing state tax revenues – forcing states to choose between higher tax rates or cutting investments in education, public services, and other vital programs.
  • The new cap on the SALT deduction also violates the constitutional principle of equal state sovereignty, by targeting a handful of states for unfavorable treatment based on their sovereign policy choices.

The lawsuit was led by New York Attorney General Barbara Underwood and includes the states of Maryland and New Jersey in addition to Connecticut.

Assistant Attorneys General Michael Skold and Mark Kohler, head of the Special Litigation Department, are assisting the Attorney General with this matter

**Download: Complaint on State and Local Tax Deduction

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