Four states to sue the federal government over the $10,000 cap on state and local tax deductions (SALT) that was part of the recently passed Tax Cuts and Jobs Act (TCJA).

Who is suing the federal government? New York, Connecticut, Maryland and New Jersey named the Secretary of the United States Department of Treasury, Steven Mnuchin along with the United States Internal Revenue Service (IRS) in their lawsuit.

What exactly is the lawsuit about? The lawsuit is a request to invalidate the $10,000 cap on these SALT deductions.

New York and the other states argue the deduction is present to prevent the federal government from using its tax authority to interfere with the state’s sovereign authority. The group points out that this deduction has been present for all or a significant portion of state and local taxes since the inception of the federal income tax in 1861.

What is included in the term SALT? SALT refers to all state and local tax deductions on federal individual tax forms including:

  • Real and personal property taxes
  • Income taxes
  • Sales taxes

This cap will impact home owners in states that are known for having high property taxes. This long-standing tax break translated to an average of $22,000 deduction for New Yorkers’ that claim the SALT deduction. Critics of the change argue these states will experience a decrease in homeownership as the change effectively increases the cost of owning a home.

What is the impact of the change? The plaintiffs estimate the cap will result in New York residents paying an additional $14.3 billion in federal taxes in 2018. Residents in the impacted states argue that they are paying for the savings of the tax law at a disproportionate rate.

States with a relatively low property tax rate, like Minnesota, are not likely to feel the impact unless they are high-income earners with large pieces of property.

A recent piece by CNBC predicts the lawsuit will not likely progress. Instead, a member of the Tax Foundation that is quoted in the piece speculates the lawsuit is an attempt to appease “angry high-income people.” Regardless of the fate of the lawsuit it provides another example of the evolving nature of tax law. The TCJA was a large piece of reform that will likely lead to additional legal challenges in the future.