How Cuomo is escalating the fight over the SALT deduction cap

WASHINGTON – New York Gov. Andrew Cuomo has escalated his fight with the Treasury Department and Internal Revenue Service over proposed rules that would block state workarounds of the tax law's $10,000 cap on the federal deduction for state and local taxes.

He sent a letter to acting Internal Revenue Service Commissioner David Kautter earlier this week threatening to sue the agency unless it withdraws the proposed rules.

The governor also sent a letter to J. Russell George, Treasury's Inspector General for Tax Administration, asking him to investigate whether President Trump, Treasury Secretary Steve Mnuchin, or other administration officials engaged in improper political interference in connection with the rulemaking.

Cuomo's letter to the IG points to a Sept. 5 statement by Mnuchin in support of an IRS clarification that the $10,000 SALT cap does not apply to business-related contributions to charities or government entities for which they receive state and local tax credits.

“The recent proposed rule concerning the cap on state and local tax deductions has no impact on federal tax benefits for business-related donations to school choice programs,” Mnuchin said.

Cuomo interpreted that statement as possible evidence of political interference by Mnuchin in the operation of the IRS.

“The IRS decision protects 14 red states that have the school tax credit program,” Cuomo said Sunday when he announced that he'd sent the letters. “Of the top 10 states who would benefit, nine voted for Trump. So you have a clear pattern. You have a tax policy designed first to hurt the blue states, that's SALT. When they issue a regulation that might actually effect the red states, they come back and they clarify that regulation to make sure the red states aren't hurt.”

The IRS clarification, however, involves a larger issue that was debated heatedly by Democrats and Republicans on the House Ways and Means Committee during the markup of the tax legislation enacted in December.

Democrats objected at that time to the ability of businesses to continue to claim unlimited business deductions for expenses such as property taxes while individual taxpayers wouldn’t.

Republicans on the committee are expected to approve three bills making up Tax Reform 2.0 on Thursday, one of which would make the cap permanent along with a $750,000 loan limit on the deductibility of mortgage interest and the deductibility of interest on home equity loans.

The $10,000 cap on the SALT deduction and permanent limits on home mortgage interest deductibility would produce $317.8 billion over the three years from 2026-2028, according to an estimate released by the nonpartisan congressional Joint Committee on Taxation Wednesday.

JCT estimated another $498.8 billion in revenue would be generated from the permanent repeal of personal exemptions on federal taxes.

But even with those revenue producing pay-fors, the bill would increase the deficit by $630.9 billion, the JCT estimates showed.

The most costly provisions include a permanent reduction in individual tax rates, doubling the standard deduction, and a permanent increase in the child tax credit.

If the committee approves it, the Protecting Family and Small Business Tax Cuts Act of 2018 (H.R. 6760) is expected to go to the full House for a vote by the end of this month. But the bill is not expected to be taken up by the Senate, where Republicans wouldn't have the votes to approve it. Passage would require a 60-vote supermajority in the Senate because the bill would increase the federal deficit and the Republicans would not likely pick up any support from the Democrats.