Judge rejects state's lawsuit over federal tax deductions

Joe Mahony

ALBANY — In a setback for the Cuomo administration, a federal judge on Monday rejected a challenge by New York and several other Democratic-led states to federal tax code revisions that capped so-called SALT deductions for state and local tax payments.

Before Congress adopted the new tax code in late 2017, no limit was set on deductions for state and local income taxes, a policy that was beneficial for many wealthy people owning expensive real estate in highly-taxed communities.

The revised tax code, passed by President Donald Trump and congressional Republicans, also increased the standard deduction for filers, a move that prompted many in New York and other states to stop itemizing on their federal returns.

Gov. Andrew Cuomo, a Democrat, argued that the revised tax code was a deliberate attempt to financially harm Democratic-leaning states such as New York. He has predicted the changes would accelerate the outward migration of people from New York.

But U.S. District Judge Paul Oetken of Manhattan ruled that Congress did not overstep its constitutional authority, finding federal lawmakers had the “plenary power to impose an income tax without a limitless SALT deduction.”

“The cap, like any federal tax provision, will affect some taxpayers more than others and, by extension, will affect some states more than others,” Oetken ruled. “But the cap, again like every other feature of the federal Tax Code, is a part of the landscape of federal law within which states make their decisions as to how they will exercise their own sovereign tax powers.”

Cuomo said in a statement he is considering challenging the ruling to a federal appeals court.

The Institute on Taxation and Economic Policy, a national think tank, projected in late 2017 that more than 70 percent of New York taxpayers would end up paying less in federal taxes as a result of the code revisions.

Cuomo, though, has maintained the capping of the SALT deduction would motivate some wealthy earners to leave the state, thus leaving those remaining to foot the bill for the services the state provides.

The fact that New Yorkers overall now pay less to the federal government in income taxes than before the tax code was updated is “without question,” said E.J. McMahon, research director for the Empire Center for Public Policy, an Albany think tank.

McMahon also said there is no evidence that the new cap on state and local taxes has caused real estate prices in New York to dip.

Earlier this year, Moody’s Investors Service, a bond rating company, said in a report about the tax code impact on New York that “jobs and demographic trends will continue to influence relocation patterns more than tax burdens.”

Cuomo, who oversees a state government with an annual budget of $175 billion, continued to criticize the tax overhaul Monday, calling it “unprecedented, unlawful, punitive and politically motivated.”

New York, meanwhile, continues to challenge the federal government’s decision to reject an effort by state officials to get around the cap by allowing local governments to create charities that would be funded by donations that could help offset tax obligations.