New Jersey Gov. Phil Murphy is confident the lawsuit his state — along with New York and Connecticut — filed Wednesday against the IRS and Treasury Department over limits on tax deductions will be successful.
The federal government imposed a new $10,000 limit on the state and local tax (SALT) deduction in the 2017 Tax Cuts and Jobs Act. The deduction had primarily been beneficial to people in high-tax states like the ones that filed suit.
The three states suing attempted a workaround by setting up charitable funds to which taxpayers could donate, and then deduct those donations from their federal taxes. But the IRS and Treasury blocked the move in June, saying that tax credits in exchange for such donations constituted a "quid pro quo," prompting the lawsuit.
"We believe that federal courts as far back as the '80's have been crystal clear about defending the very action that we believe we can take through these charitable contributions," he told CNBC's "Power Lunch" on Wednesday. "It's crystal clear that we're right which is why we're taking the action that we took today."
The suit filed in the Southern District of New York aims to push back against the constitutionality and the IRS' interpretation of the "egregious" tax law, Murphy said, and he promised to continue fighting against the 2017 tax law.
It follows another suit last year by the three states plus Maryland against the Treasury Department and Secretary Steven Mnuchin challenging the $10,000 SALT cap itself. That suit is pending.
Murphy acknowledged that the state has not yet observed significant detrimental impacts, including migration out of New Jersey or falling property values, from the 2017 tax law, but said that nearly every resident he's talked to has paid more taxes under the law.
At the same time, Murphy is continuing to pursue a new millionaire's tax in the state, which could impose a 10.75% tax rate on people with incomes over $1 million.
Spokeswomen for the Treasury and IRS declined to comment.