D.C. Kicks Off Effort to Avoid Federal Tax Deduction Cap

Daily Tax Report: State provides authoritative coverage of state and local tax developments across the 50 U.S. states and the District of Columbia, tracking legislative and regulatory updates,...

By Ryan Prete

The District of Columbia could soon split away from the new federal tax law’s limit on the state-and-local deduction.

Councilmember Mary Cheh (D) said in a statement emailed to Bloomberg Tax that “given the extremely partisan way in which the federal tax laws have been revised, it would be prudent to insulate ourselves, to the extent possible, from any ill effects the current federal tax revision could bring to our own tax systems.”

She added that the District’s “tax code contains multiple references to definitions, deduction limits, and other provisions of the federal Internal Revenue Code,”

Cheh has introduced the District Tax Independence Act of 2017, a study bill that would require the city’s Chief Financial Officer to submit a report by April 30 outlining the steps and amendments necessary to decouple the District’s tax deduction laws from the 2017 federal tax law ( Pub. L. No. 115-97), signed Dec. 22 by President Donald Trump.

Cheh’s goal is for the District’s tax code to “stand on its own, without reference to federal law.”

The proposal would act as the first step towards formally separating the District from the new federal standards. Washington joins many predominantly Democratic states, including New York, New Jersey, and California, that have already announced or promised formal reactions to the new law.

Certain to Pass

Stephen Kranz, partner and tax attorney at McDermott Will & Emery in Washington, told Bloomberg Tax he is certain the study bill will pass.

“I can’t think of a state that shouldn’t be looking at this—states need to review and decide if they should move away from the federal standard,” he said. “I suspect many states are already discussing decoupling.”

Cheh’s bill had 11 other co-sponsors when it was formally introduced Dec. 19—a veto proof majority, according to her staff.

Heavy support for the bill, which opposes the Republican-created tax plan, is expected in a District where 92.8 percent of individuals voted for Hillary Clinton—Trump’s Democratic opponent—in the 2016 presidential election.

Similar Fights

The District joins a growing wave of states trying to distance themselves specifically from the new 2017 federal tax law’s limit on the SALT deduction.

New York Governor Andrew M. Cuomo (D) and New Jersey’s Republican Senate Whip Joseph Pennacchio have announced they may try the courts or a legislative resolution to contest the new limit. The new law allows taxpayers to deduct up to $10,000 of property taxes, and state and local income or sales taxes. There was previously no limit on the amount of state and local taxes that could be deducted.

New York is still weighing a legal challenge to the new 2017 tax law’s cap on the deductibility of state and local taxes, Cuomo reiterated Jan. 3.

Cuomo said earlier that he’s “not even sure” what Republican sponsors of the tax law did is “legal or constitutional, and that’s something we’re looking at now.”

However, several leading tax attorneys told Bloomberg Tax that neither the U.S. Constitution nor Supreme Court case law prevents Congress from acting as it did to limit the deduction.

Pennacchio said in a Dec. 28 statement that he may introduce a bill this legislative session that asks Congress to reconsider the deduction limit.

The potential actions in New York and New Jersey are the latest in months-long protests over limiting the deduction by officials from high-tax jurisdictions such as New York, New Jersey, Connecticut, California, and Illinois.

$50 Million in Prepayments

In an effort to avoid the new limits in the federal law, D.C. residents raced to prepay their 2018 property taxes. The District, which allowed such prepayments unlike many jurisdictions, collected more than $50 million from about 7,500 taxpayers, according to David Umansky, a spokesman for the city’s Chief Financial Officer Jeffrey S. DeWitt.

With assistance from Sahil Kapur (Bloomberg News) in Washington

To contact the reporter on this story: Ryan Prete in Washington at rprete@bloombergtax.com

To contact the editor responsible for this story: Ryan C. Tuck at rtuck@bloombergtax.com

For More Information

Text of Cheh's bill is at http://src.bna.com/vn7.

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