New Jersey and two other states sued the Internal Revenue Service on July 17 in an effort to restore a mechanism designed to offset the effects of the $10,000 cap on federal deductions for state and local tax payments.
Gov. Phil Murphy and Attorney General Gurbir Grewal on Wednesday unveiled the legal action at a news conference in South Orange, a town with some of the highest property taxes in the state. The attorneys general of New York and Connecticut filed similar actions, according to the New Jersey officials.
At issue is a law signed last year under which local governments can set up charitable funds to which residents can make donations instead of paying taxes as usual. The donations can be deducted without being subject to the cap, which was enacted as part of the 2017 tax law. The IRS has ruled that the local funds cannot be used to avoid the limitation.
Murphy called the IRS action a “gut punch to New Jersey middle class families” and decried the “politicization of the federal tax code” by the 2017 law, which he said was “created to punish” high-tax states like New Jersey and the other plaintiffs.
Grewal noted that 33 other states have enacted schemes that allow charitable vehicles to be used to fund some functions traditionally supported by tax dollars. “But when New Jersey, New York and Connecticut followed suit, the IRS adopted brand new rules that shut them down.”
Asked about the chances for success in court, Grewal acknowledged that similar rulemaking challenges launched during the Obama administration did not gain legal traction. But he contended that “80 or 90 percent” of the challenges against the Trump administration have succeeded.
In addition, Grewal said, the plaintiff states are not attempting to advance a novel legal theory. “Every argument that we make in this complaint and that we will make in court is an argument that the IRS has supported in the past,” he said.
While Grewal noted that no municipality has set up a charitable fund contemplated by the 2018 law because of the uncertainty surrounding the IRS position, the state has received inquiries from local governments about the process.
The suit was filed in U.S. District Court for the Southern District of New York.