Maryland Joining Other States in Suit Over Federal Tax Act

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 Che Odom

Maryland will join other states in challenging the constitutionality of the new federal tax law’s $10,000 cap on the deduction for taxes paid to state and local governments.

While a complaint hasn’t been filed, Democratic governors from New York, New Jersey, and Connecticut have said they plan to sue the federal government over the 2017 federal tax act, saying it’s unconstitutional and targets Democrats who didn’t vote for President Donald Trump in the 2016 election. Connecticut Gov. Dannel P. Malloy (D) told reporters during a Jan. 26 joint conference call that the lawsuit would be filed in federal court in the next several weeks.

Maryland Attorney General Brian E. Frosh (D) said in a Feb. 1 statement that the deduction limit in the federal tax law ( Pub. L. No. 115-97) will lead to increased taxes for more than half a million Maryland taxpayers. The federal deduction was previously unlimited.

“It is an attack on state sovereignty and an attempt to cripple our ability to educate our kids, protect the Chesapeake Bay, and build the infrastructure that Maryland needs to be competitive in the world economy,” he said.More than half a million Marylanders will lose $6.5 billion in state and local tax deductions—an average of $11,800 per taxpayer, according to Frosh’s statement.

State Workarounds

In addition to threatening legal action, several states are considering ways to get around the new deduction limit.

Officials in New York and Connecticut may partially replace income taxes for wage earners with a new payroll tax system.

California, Illinois, Maryland, Nebraska, New Jersey, New York, Virginia, and Washington state are examining the use of charitable contributions to entities that provide public services as a way of mitigating increased tax burdens, Sarah McGahan, a member of KPMG LLP’s State and Local Tax group, said during a webinar Feb. 1.

To contact the reporter on this story: Che Odom in Washington at codom@bloombergtax.com

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

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