Blue States Sue Over GOP Tax Law

Plus, a fight over veterans health funding By Yuval Rosenberg and Michael Rainey 4 Blue States Sue Over SALT Deduction Four states sued the federal government Tuesday, claiming that the new $10,000 limit on state and local tax (SALT) deductions is an “unconstitutional assault on states’ sovereign choices.” The [suit]( which names Treasury Secretary Steven Mnuchin, acting IRS commissioner David Kautter and the United States of America among its defendants, was filed in the Southern District of New York. The four states — Connecticut, Maryland, New Jersey and New York — assert that the SALT deduction cap, which was created in the Republican tax bill signed into law in December, violates the Sixteenth and Tenth Amendments. The Sixteenth Amendment, adopted in 1913, facilitates the federal government’s collection of income taxes, while the Tenth Amendment, which is part of the Bill of Rights and was ratified in 1791, states that all powers not explicitly delegated to the federal government by the Constitution are reserved for the states. The suit claims that the unlimited SALT deduction is protected by the Constitution, and that the effort to limit it unfairly targeted states with higher local taxes. “This cap is unconstitutional - going well beyond settled limits on federal power to impose an income tax, while deliberately targeting New York and similar states in an attempt to coerce us into changing our fiscal policies and the vital programs they support," said New York Attorney General Barbara D. Underwood in a [statement](. According to a [press release]( from New York Governor Andrew Cuomo, the deduction cap will cost New York residents $14.3 billion in higher tax federal tax payments this year, and $121 billion between 2019 and 2025. The suit, which has been expected for months, received little support from legal and tax experts in the hours following the announcement. Jared Walczak of the Tax Foundation [tweeted]( “The New York-led lawsuit challenging the constitutionality of the SALT deduction cap is very creative but not very convincing. (That's being polite.)” In a rapid-fire [analysis]( on Twitter, University of Iowa law professor Andy Grewal wrote, “If this lawsuit succeeds, I will post a video of myself eating every single page of the Internal Revenue Code, one-by-one.” [Share this story →]( The Trump White House Makes a ‘Trillion-Dollar Admission’ The White House Office of Management and Budget on Friday released its [updated annual budget request]( known as the mid-session review. The numbers don’t mean much given that the president’s budget won’t be enacted — but they do contain what the Committee for a Responsible Federal Budget [calls]( “a very big trillion-dollar admission.” Namely, the White House’s own deficit projections keep rising, thanks to the recently passed tax cuts and spending increases. The updated budget now includes a projected 2019 deficit of $1.085 trillion, up from [$984 billion]( in February — and more than double the $526 billion the White House called for in its 2018 budget. “This is a striking acknowledgement following almost two years of claims that economic growth unleashed by these policies will wipe deficits away,” said Maya MacGuineas, president of the Committee for a Responsible Federal Budget. Meanwhile, the average annual growth rate projected over 10 years has dropped under 3 percent. [Share this story →]( Lawmakers Battle Over Veterans Health Funding A complicated fight over spending on a veterans health program is throwing a wrench into the congressional appropriations process for 2019. The showdown could force lawmakers to fall back on another continuing resolution to avert a government shutdown once 2018 funding runs out at the end of September. What the fight is about: The issue is whether to stay within current budget caps or to go beyond those limits, set as part of a bipartisan deal earlier this year, to fund the popular VA Choice program and its successor under the recently enacted [VA Mission Act](. The question arose after President Trump last month signed into law the VA Mission Act, which shifted funding sources for some veterans health programs and required Congress to allocate discretionary money for them. “Because that shift came after the budget deal was struck, top spending leaders in the Senate contend that it doesn’t make sense to be constrained to the old top line established before the change to the veterans program,” Politico’s Sarah Ferris and Jennifer Scholtes [report](. What the two sides say: The [White House]( and Republicans leaders of the House and Senate budget committees have come out in favor of sticking with the existing budget caps and finding funding offsets elsewhere. “It is entirely reasonable to expect that Congress can find the $1-2 billion needed within the overall $597 billion spending limit,” Sen. Mike Enzi (R-WY) and Rep. Steve Womack (R-AR) wrote in a [letter]( to fellow appropriators. But Senate Appropriations Committee Vice Chairman Patrick Leahy (D-VT) last week argued that [deep cuts]( to other domestic or veterans programs would be necessary if VA Choice were to be funded under existing caps, since the program will face an $8.67 billion shortfall in fiscal 2020 and a $9.5 billion shortfall the following year. House leaders last week abruptly called off a negotiating session on the first three of 12 required fiscal 2019 spending bills once it became clear that Leahy was planning to offer an amendment that would fund the veterans health efforts with money above the budget caps, Politico said. Why it matters: Beyond the matter of funding the veterans program, “the breakdown does not bode well for broader spending negotiations leading up to the fiscal 2019 deadline,” Ferris and Scholtes write. [Share this story →]( Treasury Rule Change Protects ‘Dark Money’ Donors The Treasury Department said Monday that it will no longer require certain tax-exempt organizations to identify their donors to the IRS. The policy change will free labor unions and other groups, including issue advocacy organizations and politically active nonprofits, from having to disclose to the IRS the identities of “dark money” contributors who give more than $5,000. The groups affected include the U.S. Chamber of Commerce, an arm of the National Rifle Association, Planned Parenthood and the Koch-backed Americans for Prosperity. “Americans shouldn’t be required to send the IRS information that it doesn’t need to effectively enforce our tax laws, and the IRS simply does not need tax returns with donor names and addresses to do its job in this area,” said Treasury Secretary Steven Mnuchin. Charities and political groups will still have to provide the names and addresses of their donors, but the Treasury Department said that the change will better protect the privacy of the donors to other nonprofits and prevent their information from being misused or leaked. The new policy “will save both private and government resources,” Treasury said, because the nonprofit groups will be able to avoid extra paperwork and the IRS will no longer have to redact donor names and addresses before making tax filings public. The nonprofits will still have to keep a record of their donors and make it available to the IRS for audits. Conservatives, who had long sought the change, say it represents a victory for free speech and will prevent the IRS from targeting organizations for their political leanings. Critics say it could open the door for the organizations involved to hide illegal [foreign contributions]( and will increase the political power of anonymous “dark money” donors. Sen. Ron Wyden (D-OR), the ranking Democrat on the Senate Finance Committee, [said]( Tuesday that he will vote against President Trump's pick to head the IRS, Charles Rettig, unless he commits to reverse the change. The Senate Finance Committee is scheduled to vote on Rettig's nomination on Thursday. [Share this story →]( Like this newsletter? Tell your friends they can [sign up here]( to get their own copy. We always welcome your feedback. Email yrosenberg@thefiscaltimes.com. Or connect with us on Twitter: [@yuvalrosenberg]( [@mdrainey]( and [@TheFiscalTimes](. F-35 Price Drops Below $90 Million: Report The Pentagon has made a preliminary deal with Lockheed Martin for the next batch of F-35 stealth jets, according to a Reuters [report]( from the Farnborough Airshow in England. The “handshake agreement” for the purchase of 141 F-35s for delivery in 2020 is worth roughly $13 billion, which implies a 6 percent reduction in the per-unit price. The last batch of F-35s — known as LRIP 10, for “low rate initial production” — had a per-unit price of $94 million for the F-35A, the most common variant of the jet, used by the U.S. Air Force. The per-unit price for LRIP 11 will be roughly $88 million, though prices are higher for the other two versions being purchased by the Navy and the Marines. The agreement for the latest batch of F-35s was delayed for months as the Pentagon investigated the ongoing delays and runaway costs in the stealth jet program. If the current deal is completed, it could be the last low-rate production agreement before mass production begins. The Pentagon expects to purchase more than 3,000 F-35s, with the per-unit cost eventually falling to roughly $80 million. 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