By Joseph De Avila 

A coalition of states led by New York sued the federal government Tuesday, alleging that last year's tax overhaul was politically motivated and designed to interfere with the rights of states to manage their finances.

New Jersey, Connecticut and Maryland joined New York in the federal lawsuit filed in U.S. District Court in New York. The lawsuit takes aim at a part of the new tax law limiting federal tax deductions for state and local taxes to $10,000.

The plaintiffs said the new law raises the federal tax liability of millions of taxpayers in those states, making it more difficult for the states to maintain their taxation policies. The tax law also seeks to force the states to slash public spending, the plaintiffs said.

"It was a political attempt to hurt Democratic states," Democratic New York Gov. Andrew Cuomo said in a conference call with reporters.

In 2015, the states with the highest percentage of tax filers who claimed deductions for state and local taxes above $10,000 were blue states, according to the Pew Charitable Trusts.

A spokesman for the Internal Revenue Service said the agency doesn't comment on pending litigation. The Treasury Department said it is reviewing the complaint.

The states are asking the courts to declare the limit on federal deductions for state and local taxes as unconstitutional. The plaintiffs also want the courts to enjoin the Trump administration from enforcing the cap.

The conservative-leaning Tax Foundation said the courts are unlikely to declare that capping federal tax deductions for state and local taxes is unconstitutional.

"The concern that high state taxes might harm the competitiveness or attractiveness of a state like New York or Connecticut is a valid one, but the solution lays with revisiting those state tax rates rather than meritless litigation," Joseph Bishop-Henchman, executive vice president of the Tax Foundation, wrote in an analysis of the litigation.

Connecticut Gov. Dannel Malloy, a Democrat, said taxpayers in his state would lose $10.3 billion in state and local tax deductions. "Hundreds of thousands of residents could see a tax increase even as their property values decrease," Mr. Malloy said.

Most Connecticut residents, however, will get a tax cut this year, according to the Tax Policy Center, a research group run by a former Obama administration official. About 8.4% of Connecticut households will pay more in 2018 than they would have under the old law, compared to 6.3% nationally.

In New York, 8.3% will pay more, according to the Tax Policy Center. In New Jersey it is 10.2%, and in Maryland, 9.4%.

New York, New Jersey and Connecticut have also passed laws designed to blunt the impact of the tax-law changes. These new state laws allow taxpayers to make payments to charitable organizations controlled by local governments in exchange for credits against their state or local taxes.

The legislation aims to let taxpayers deduct these payments as charitable contributions for federal income-tax purposes, while using the same payments to satisfy local tax liabilities.

The IRS said in May it would soon issue regulations addressing these new state laws.

(END) Dow Jones Newswires

July 17, 2018 14:26 ET (18:26 GMT)

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