Several years ago, our office published an article examining the subject of cumulative taxation. Under the Due Process Clause of the 14th Amendment, state taxes must not subject a taxpayer to an unfair cumulative tax burden. We reported about the landmark decision involved the Geoffrey Corporation, and the South Carolina regulation that left it subject to double taxation. In the matter of Container Corporation of America v. Franchise Tax Board 463 U.S. 159 (1983), the petitioner successfully persuaded the Court that double taxation is unconstitutional. In ruling in favor of the petitioner, the Court noted that “the principles enunciated in that case should be controlling here: a state tax is unconstitutional if it … creates a substantial risk of international multiple taxation…” Citing Japan Line, Ltd. v. County of Los Angeles, 441 U. S. 434 (1979).
With these cases in mind, we now need to revisit the rules regarding cumulative taxation as they may relate to Public Law 115-97 (Also known as the 2017 Tax Bill). In the wake of the revised tax code, some taxpayers are asking us why there was a need to revise the tax structure, which had ostensibly worked for more than 30 years. While avoiding partisan politics as much as possible, we explain that eight years of reckless government spending under the Obama administration has left our nation with an insurmountable amount of public and foreign debt. On the day that President Obama took office, the national debt was $10.6 Trillion. By the day President Obama left office, the national debt had increased by nearly 70% to $18 Trillion!
Unfortunately, we are all responsible for repaying this debt (along with interest). In an effort to reduce this debt, the Trump Administration and members of the legislature went to work on revising the Tax Code. The new tax bill contained several controversial provisions. One of the most unpopular aspects of the new Tax Code was a reduction to the corporate tax rate, which was inserted in order to ensure that American businesses would continue to thrive and keep Americans employed. We offer no opinion or prognostication as to whether this strategy will work. Rather, our focus in this article is only on the portion of the bill that relates to deductions for State and local taxes.
Section 11042 of the new tax code sets forth that “…the aggregate amount of taxes taken into account under paragraphs (1), (2), and (3) of subsection (a) and paragraph (5) of this subsection for any taxable year shall not exceed $10,000 ($5,000 in the case of a married individual filing a separate return).”
Prior versions of the Tax Code allowed taxpayers to deduct all tax payments made to State and local taxing authorities. While the states of Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming have no state income tax, the other 43 states do have state income taxes. Some states like California, New Jersey and New York have very high state income tax rates, which may very likely subject a taxpayer to taxes that far exceed the $10,000 maximum exemption set forth in the new Tax Code. The net result is that some taxpayers are going to be subject to double taxation, which is problematic and will likely lead to judicial scrutiny as States and individual taxpayers take their arguments to the Courts. New York’s Governor Cuomo and New Jersey’s incoming Governor Phil Murphy are already threatening to commence legal action against the Federal Government in the wake of the new tax bill.