Main Street in Downtown Tarrytown in Westchester County, NY. Current $10,000 tax deduction cap is well below what residents in areas like Westchester and Long Island have to pay. (Photo: Guiggyt4 via Shutterstock)

Attorneys for New York state and the Trump administration are set to square off in Manhattan next month over a provision of the 2017 federal tax law that capped the amount individuals can deduct from their state and local taxes, or SALT.

A lawsuit brought against the federal government last year over the SALT cap by New York and a coalition of other states will come to a head as each side presents their arguments for and against the law.

The Trump administration has moved to dismiss the lawsuit, while New York is asking U.S. District Judge J. Paul Oetken of the Southern District of New York to strike down the SALT cap. Each side will present arguments on the motions before Oetken on June 18, according to the case docket.

New York, which is leading the lawsuit, has argued that the law violated the principles of federalism by changing the tax structure in the affected states. The law capped the amount residents are allowed to deduct in state and local taxes at $10,000, which is well below what residents in areas like Westchester County and Long Island pay, on average, in property taxes.

Without the ability to deduct the full amount of their state and local taxes, those residents will have a higher tax liability, the states have argued. They claim that, to maintain the economic viability of those areas, the states will be forced to redistribute spending to lower property taxes. That could reduce investment in other areas, which cuts to the heart of the federalism argument.

Attorneys for the states argued as much in their most recent filing from March against the tax law. Connecticut, Maryland and New Jersey are also plaintiffs in the litigation.

“Both the purpose and the effect of the new cap is to inflict economic harm on the Plaintiff States, with the intent of coercing them into lowering their tax rates and cutting public investments,” the states wrote. “Although Congress's tax power is broad, it does not justify such an egregious interference with the sovereign authority of the States to determine their own taxation and fiscal policies.”

The states have also argued that the SALT cap was implemented as a politically motivated attack on states controlled by Democrats, such as New York. A spokesman for Gov. Andrew Cuomo echoed the same argument in a statement Monday.

“This direct, partisan attack on blue states is only made more egregious by the fact that New York is already the number one 'donor state' in the nation—contributing $36 billion more to the federal government than we get back every year,” said Jason Conwall, a Cuomo spokesman. “New York has been and will continue to organize states and lead the fight against this disastrous double tax.”

The Trump administration called that claim “questionable at best” in a recent filing seeking to dismiss the litigation, which was brought last year by former New York Attorney General Barbara Underwood.

“Much of the States' purported 'evidence' of targeted, differential harm is questionable at best,” the Trump administration wrote. “They argue that the 2017 Tax Act was expressly 'designed' to penalize their taxpayers while rewarding those in other states, but marshal little support for this conclusory point.”

The Trump administration said in the same filing, and on other occasions, that states with higher-than-average state and local taxes aren't required to do anything in response to the federal tax law. They could, the administration argued, keep their spending priorities the same or change them as they see fit. Either way, the cap is constitutional, it argued.

“They need not participate in any federal process, and they may choose to adjust their fiscal policies in any number of ways in light of the 2017 Tax Act, or not at all,” the administration wrote. “Moreover, the States do not explain the difference between this supposed injury and any other scenario in which a state contemplates taking some action in response to a change in federal law that affects its citizens.”

The law has been a frequent target this year of Cuomo, who has claimed it will increase the cost of living in New York and cause high-income residents to flee the state for less-expensive places to live. Cuomo attributed the law to a gap in state income revenue the state realized earlier this year amidst negotiations on the state budget.

That put pressure on discussions around the state spending plan, Cuomo said at the time. When asked on more than one occasion what the largest hurdle was to resolving the state budget, Cuomo and lawmakers said it was the revenue shortfall outlined in January.

Cuomo and lawmakers were initially inclined to adjust spending for Medicaid, and possibly education, but were able to balance the books by the budget deadline at the end of March. The states argued in their most recent filing that it would be unlawful for states to have to adjust their spending and taxing policies to mitigate the consequence of the new federal tax law.

“It is irrelevant that the States can potentially avoid the financial harms intended by the new cap by changing their policies,” the states wrote. “The new cap on the SALT deduction further implicates the sovereign interests of Plaintiff States by attempting to override their public investment decisions.”

Cuomo has been out front on advocating for the repeal of the SALT cap, even meeting with President Donald Trump personally in Washington, D.C., over the law earlier this year. That discussion merited no results, and there's been no appetite in Congress to rollback the provision as of yet.

Arguments on the lawsuit will be held at the Thurgood Marshall Courthouse in Manhattan on June 18.

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