Latest posts by Dan Pilla (see all)
- The IRS at the Breaking Point - November 18, 2019
- Dayton to Take Minnesota in the Wrong Direction - April 10, 2018
- Democrat Governors to Sue Over Jobs Act; Seek to Challenge $10,000 Tax Deduction Cap - February 27, 2018
Democratic governors from New York, New Jersey, Maryland and Connecticut claim they will sue the federal government over the Tax Cuts and Jobs Act. They claim that the provision capping the deductibility of state and local taxes at $10,000 is unconstitutional. They claim the provision is based on politics, not fiscal policy. Specifically, they allege that the law retaliates against Democrats for not voting for Donald Trump. Apparently, the suit will be filed in the coming weeks.
Because Democrat controlled states have much higher state taxes than other states, the new limit on deducting state and local taxes may negatively impact those living in such states. Maryland Attorney General, Democrat Brian E. Frosh, said in a statement that the deduction limit will lead to higher taxes for more than half a million people in his state. He said that same number of Marylanders will lose $6.5 billion in state and local tax deductions—an average of $11,800 per taxpayer.
There is little doubt but that the suit is destined to fail. First, as a matter of settled tax law, the courts have ruled thousands of times over the many decades that we’ve been burdened with the income tax that deductions “are a matter of legislative grace.” The courts have held repeatedly that there’s no constitutional right to a deduction and that the rules and procedures imposed for the allowance or not of a particular deduction are solely within the province of the legislature. Thus, when Congress makes a rule providing a particular limit, or imposes a unique burden of proof to support a deduction, there’s simply nothing anybody can do about it.
Let me give you two quick examples. First, during the Clinton Administration, Congress put a cap on the amount of home mortgage interest you can claim. The rule was that you could deduct interest on a home loan up to $1 million. That is to say, if your mortgage was at or below $1 million, you could write off all the interest. If the mortgage was over $1 million, only the interest up to $1 million of debt was deductible. See code §163(h).
It was Clinton and the Democrats who grandstanded for this limit. They argued that the federal government should not subsidize “mansions for rich people.” Democrats were likewise responsible for even further limits on mortgage interest deductions. They capped the deductibility of home equity loan interest at $100,000 of debt. That is, the portion of interest on loans above $100,000 was not deductible.
The Jobs Act only exacerbated these conditions. Under the new law, the interest deduction on a primary home loan is reduced even further. It is now capped at $750,000, and, as I’m sure will shock many taxpayers, the law “suspends” the deduction for interest on a home equity loan entirely. Thus, for tax years beginning in 2018, you may not claim a deduction for interest on home equity debt in any amount. The suspension ends, as will all the elements of the Jobs Act, beginning after December 31, 2025.
I’m curious why the Democrats aren’t complaining about that.
The second example involves charitable contributions. Democrats likewise spearheaded a move to impose special documentation requirements on charitable contributions. The rules provide that if you make a charitable contribution of $250 or more (in a one-time gift, not a total of all gifts over the year), you must have a “contemporaneous acknowledgement” of the gift from the organization to which you gave the money. See code §170(f). Even if you have a canceled check to prove you gave the money, the IRS will disallow the deduction if you don’t have a written acknowledgement from the organization to which you gave the money.
These rules impose higher taxes on taxpayers because of the limits on what is deductible (in the case of mortgage interest). They likewise impose additional compliance costs and burdens on people and organizations to make and keep additional layers of paperwork in order to prove their entitlement to deductions (in the case of charitable gifts).
Where were the Democrat governors when these costs and burdens were being heaped on taxpayers? I’ll tell you where they were. They were leading the charge for higher taxes and more burdens, that’s where. They were at the head of the parade demanding that rich people pay their “fair share.” They were at the head of the parade demanding that charities and people voluntarily funding them incur more costs and burdens, probably in the hope that people would give less money to charities.
The second reason the suit will fail has to do with the burden of proof. How on earth will the Democrats ever prove their claim that the tax deduction provision of the Jobs Act was motivated by revenge? They say that limiting the deduction is based on politics, not fiscal policy. This is quintessential hypocrisy. Every element of Democrat tax policy over the past fifty years has been based on greed and envy, not fiscal policy. This was never more obvious than in the election that Trump won. Please recall how vociferously Hillary and Bernie argued for higher taxes on everybody in general, and the rich in particular, because it “just wasn’t fair” that some people in America were more successful and prosperous than others.
Even the holy grail of Democrat tax policy—the graduated income tax—has no foundation in the Constitution. Nor does it find any support in sound economic policy. Everyone knows that you collect more taxes at lower rates than you do at higher rates. And to top it off, a graduated income tax is fundamentally immoral in a society whose founding principal is that all people are equal under the law. But none of that stops them from insisting, not only on retaining the Marxist concept, but further and more deeply engraining it into our national tax policy.
If Democrat governors gave two hoots about the economic conditions of their states and the purses of their citizens, they would stop wasting time and resources on frivolous lawsuits that cannot succeed. Instead, they would get to work immediately to cut their state taxes and get their state spending messes in order.
Let’s see how fast they get busy on that.