Tax Reform Friday: Tax Reform and the SALT Cap Move to Version 2.0

Last year’s federal tax reform made many changes to the federal tax code. To some, these changes did not go far enough, while others are seeking to undo the changes reform has wrought. 

This week, Rep. Kevin Brady (R-Texas), Chairman of the House Ways and Means Committee, released a two-page outline of “Tax Reform 2.0,” styled as a “listening session framework,” after promising a follow-up to last year’s tax reform legislation for the last several months. Though sparse on details, the outline focuses on three areas. The primary concern is making the reductions in the personal and small business tax rates permanent; these rates will otherwise expire in 2026. The outline also discusses expanding savings programs. Specifically, it proposes a new type of “flexible savings tool for families,” encouraging more use of 529 accounts and penalty-free withdrawals from retirement accounts for new baby expenses. Finally, the Brady outline also proposes allowing new businesses to write off their start-up costs. The Daily Tax Report indicates that Brady is looking for a House vote in the fall, possibly on multiple bills. The tax benefits seem aimed at small businesses and individuals and may have an impact on state and local individual income taxes. But, without more detail, it’s difficult to determine the potential state tax implications of Brady’s framework.

In the meantime, several states in the Northeast have initiated their own version of “Tax Reform 2.0.” Last year’s legislation limited the federal SALT deduction to $10,000, which heavily affected states, such as New York and New Jersey, where state income tax and local property taxes put significant numbers of their population over that limit. After initially trying to find ways to allow its citizens to maneuver around the cap, those states are now attempting a frontal assault. The attorney general of New York, along with the attorneys general of New Jersey, Connecticut, and Maryland, filed suit against the federal government claiming that the new SALT cap is unconstitutional. The states’ theory is that the enactment of the cap violates Article I, Section 8 of the U.S. Constitution and the 10th and 16th amendments, because it “interfer[es] with the Plaintiff States’ sovereign authority to determine their own fiscal policies.”

The case is New York, et al. v. Mnuchin, et al., 18-cv-6427, in the U.S. District Court for the Southern District of New York.

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: Do you think the states will be successful in their lawsuit?

For more information on the impact of Pub. L. No. 115-97, examine Bloomberg Tax’s Tax Reform Roadmap, showing detailed comparisons between pre-reform law and impending changes, with pertinent cites attached.

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