State Of New York et al v. Mnuchin et al

Filing 1

COMPLAINT against David J Kautter, Steven T. Mnuchin, United States Department of Treasury, United States Internal Revenue Service, United States Of America. (Filing Fee $ 400.00, Receipt Number 0208-15330056)Document filed by State of Maryland, State Of Connecticut, State Of New York, State of New Jersey. (Attachments: #1 Exhibit 1, #2 Exhibit 2, #3 Exhibit 3, #4 Exhibit 4, #5 Exhibit 5)(Olsen, Caroline)

EXHIBIT 2

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
__________________________________________
STATE OF NEW YORK,
STATE OF CONNECTICUT,
STATE OF MARYLAND, and STATE OF
NEW JERSEY,
Plaintiffs,
v.
STEVEN MNUCHIN, in his official capacity
as Secretary of the United States Department
of Treasury; the UNITED STATES
DEPARTMENT OF TREASURY; DAVID J.
KAUTTER, in his official capacity as Acting
Commissioner of the United States Internal
Revenue Service; the UNITED STATES
INTERNAL REVENUE SERVICE; and the
UNITED STATES OF AMERICA,
Defendants.

DECLARATION OF SCOTT PALLADINO
SCOTT PALLADINO, declares under penalty of perjury pursuant to 28 U.S.C. § 1746,
that the following is true and correct:
I.

Education and Background
1. I am the Deputy Commissioner of the New York State Department of Taxation and
Finance (“DTF”). I was appointed to this position in February 2018.
2. As Deputy Commissioner, I oversee the Office of Tax Policy Analysis (“OTPA”), which
operates within DTF and is responsible for developing and evaluating tax policy, revenue
forecasting and estimation, and related matters.
3. I previously served as Assistant Deputy Commissioner in the Office of Tax Policy
Analysis. I was appointed to that position in January of 2011.

1

4. I previously served for nearly ten years as Deputy Fiscal Director for the Committee on
Ways and Means of the New York State Assembly, which has jurisdiction over tax
legislation in the New York State Legislature, and as a Senior Policy Analyst at the
National Governors Association for nearly three years.
5. I hold a Bachelor’s Degree in Business Administration from Baruch College and a
Master’s Degree in Economics from the State University of New York, Albany.
6. DTF receives sample files from the Statistics of Income (“SOI”) program operated by the
Internal Revenue Service (“IRS”) that enable DTF to reliably estimate the impact of
federal tax law changes on New Yorkers’ federal tax liability.
7. The OTPA has been approved by the IRS to use these statistical files for preparing tax
models or other statistical compilations for state tax administration purposes.
8. The most recent SOI modeling data provided by the IRS is a weighted sample file of
approximately 28,000 anonymized federal taxpayer records filed by New York residents
for the 2015 tax year. Each record contains taxpayer specific information pertaining to
over 3,500 federal personal income tax variables. These variables include detailed filing
information about various factors, such as filing status, number of exemptions, age,
wages earned, and dividends and capital gains received, as well as itemized deductions,
credits, and final tax liability. DTF’s agreement with the IRS allows OTPA staff to
analyze this data through a microsimulation model of federal income tax liability.1 In
addition, DTF uses the data to analyze summary statistics on various tax items that
directly or indirectly impact New York State personal income tax revenue collections.
9. I have substantial experience preparing and analyzing such DTF estimates.
10. I was asked to analyze the impact of the Public Law No. 115-97 (the “2017 Tax Act”) on
New York, including the impact of changes to federal exemptions, deductions and credits
on New York tax revenues and the federal tax burdens of New York taxpayers.

1

The model essentially calculates federal adjusted gross income and tax liability by
recreating a taxpayer’s federal income tax return. The output is presented as a weighted sum of
each observation and may be stratified by income or filing status. The microsimulation model is
used to estimate the impact of hypothetical tax law changes.
2

11. My analysis of the impact of the 2017 Tax Act included an analysis of the impact of the
new cap on the federal deduction for state and local taxes (the “SALT Deduction Cap”)
as enacted in § 11042 of the 2017 Tax Act. When used herein, the term “SALT” refers to
the state and local taxes, the deduction of which is capped by the SALT Deduction Cap.
12. My analysis of the SALT Deduction Cap addresses several issues, including the impact
of the SALT Deduction Cap on New York State and the relative impact of the SALT
Deduction Cap across different States.
13. My opinions are based on analyses conducted by myself and others at DTF under my
direction and supervision, my review of analyses conducted on behalf of other States, my
review of analyses conducted by third parties, my review of publicly available
documents, and the totality of my professional experience. The following statements are
true and accurate to the best of my knowledge.
14. In sum, based on the data and assumptions stated below, my conclusions are:
a. The SALT Deduction Cap raises New Yorkers’ federal tax liability by $14.3
billion in 2018, and by $121 billion from 2018 to 2025, when compared to federal
tax law under the 2017 Tax Act without that cap. These increases will occur for
upstate and downstate taxpayers, including those in middle-income tax brackets.
See infra Section II.
b. New York, Maryland, New Jersey, California, and Connecticut have the highest
percentages of taxpayers who will see a federal tax increase under the 2017 Tax
Act; New York has the highest such percentage. See infra Paragraph 29.
c. When compared to their baseline shares of the federal tax base, the 2017 Tax Act
disfavors States such as New York and New Jersey, and favors States such as
Alaska, Florida, Texas, and Wyoming. See infra Paragraphs 32–41.
II.

Impacts on New York State
15. In this section, I analyze the impact of the SALT Deduction Cap on the State of New
York by using the results of a micro-simulation model to compare the effects of the 2017
Tax Act to what 2018 Federal law would have been absent the 2017 Tax Act. In addition,

3

the model estimated the effects of the 2017 Tax Act with and without the SALT
Deduction Cap.
16. Under the 2017 Tax Act, the SALT Deduction Cap applies for eight taxable years. It goes
into effect for tax year 2018, and it expires after tax year 2025.
17. I conclude that the SALT Deduction Cap raises federal tax liability for New York
taxpayers by $12.8 billion relative to what they would have paid absent the cap, assuming
all other provisions of the 2017 Tax Act remain unchanged. This estimate is based on
2015 income using 2018 federal parameters. Trending incomes forward from 2015 to
2018 yields an increase in federal liability of $14.3 billion by federal tax year 2018.
18. Over the course of the eight years the SALT Deduction Cap will be in effect, I expect that
New York taxpayers will collectively pay an additional $121 billion in federal taxes
relative to what they would have paid under the 2017 Tax Act without the SALT
Deduction Cap. This conclusion is based on estimates performed by the New York State
Division of the Budget (DOB) of the growth in the cost of the SALT Deduction Cap to
New York resident taxpayers who itemize at the state level for each year through 2025.2
This is reflected in the table below:

Increased Tax Liability for New York Taxpayers Due To SALT Deduction Cap
(2018-2025)
2018
$14.3 billion
2019
$14.5 billion
2020
$14.8 billion
2021
$15.0 billion
2022
$15.3 billion
2023
$15.5 billion
2024
$15.7 billion
2025
$15.9 billion
Total: $121 billion

2

DOB obtains growth factors based on detailed tax return data for those New York State
resident taxpayers that itemized at the State level for the 2015 tax year. A detailed description of
how DOB trends the components of taxable income forward appears in New York State Division
of the Budget, Economic, Revenue, and Spending Methodologies, November 2017, pp. 62-73,
https://www.budget.ny.gov/pubs/supporting/MethodologyBook.pdf
4

19. For tax year 2018, taxpayers in downstate New York, including low- and middle-income
taxpayers,3 will pay an additional $12.8 billion per year in federal taxes because of the
SALT Deduction Cap, relative to 2018 federal tax law absent the SALT Deduction Cap.
Specifically, I estimate that the SALT Deduction Cap will increase federal taxes paid by
the following amounts:
a. $165 million from taxpayers with adjusted gross incomes (“AGI”)4 between
$25,000 and $99,999 per year;
b. $800 million from taxpayers with AGIs between $100,000 and $199,999 per year;
c. $2 billion from taxpayers with AGIs between $200,000 and $499,999 per year;
d. $1.6 billion from taxpayers with AGIs between $500,000 and $999,999 per year;
e. $3.2 billion from taxpayers with AGIs between $1 million and $4,999,999 per
year;
f. $1.2 billion from taxpayers with AGIs between $5 million and $9,999,999 per
year; and
g. $3.8 billion from taxpayers with AGIs above $10 million per year;
20. Similarly, I estimate that the SALT Deduction Cap will result in upstate taxpayers paying
$1.5 billion more per year in federal taxes relative to 2018 federal tax law absent the
SALT Deduction Cap, including:
a. $25.8 million from taxpayers with AGIs between $25,000 and $99,999 per year;
b. $195 million from taxpayers with AGIs between $100,000 and $199,999 per year;
c. $425 million from taxpayers with AGIs between $200,000 and $499,999 per year;

3

For purposes of this declaration, the term “downstate” refers to the following counties:
Bronx, Kings, New York, Queens, Richmond, Nassau, Suffolk, and Westchester. The term
“upstate” refers to all other counties in New York State.
4

“Adjusted gross income” refers to a taxpayer’s total gross income minus specific
deductions.
5

d. $220 million from taxpayers with AGIs between $500,000 and $999,999 per year;
and
e. $286 million from taxpayers with AGIs between $1 million and $4,999,999 per
year.
21. Though many New Yorkers will see a federal tax reduction because the 2017 Tax Act
reduces tax rates and makes other changes to the tax code, more than one million New
York taxpayers will see a net tax increase in 2018, primarily due to the SALT Deduction
Cap.
22. In particular, for tax year 2018, more than 823,000 New Yorkers downstate will see an
average federal tax increase of approximately $6,250, and more than 221,000 New
Yorkers upstate will see an average federal tax increase of more than $2,300.
III.

Comparative Impact of 2017 Tax Act Across States
23. In this section, I analyze the comparative impact of the 2017 Tax Act across States.
24. I find that, as described below, the 2017 Tax Act has the effect of disadvantaging New
York, New Jersey, and other similarly situated States relative to many other States.
25. The Institute for Taxation and Economic Policy (“ITEP”) has published estimates of the
impact of the 2017 Tax Act across States. ITEP is a non-profit, nonpartisan research
organization that provides in-depth analyses on the effects of federal, state, and local tax
policies. ITEP researchers use a tax incidence model to produce distributional and
revenue analyses of current tax systems and proposed changes at the federal, state, and
local level.
26. In my experience, ITEP produces reliable estimates of the likely impacts of tax policy
changes.
27. According to ITEP data that I have reviewed, New York and other similarly situated
States have the highest percentage of taxpayers who will experience a net tax increase
because of the 2017 Tax Act. Based on my observation of publicly available data, I
believe this is due primarily to the SALT Deduction Cap.
28. As reflected in the table below, New York has the highest percentage of taxpayers who
will experience a net tax increase under the 2017 Tax Act.
6

Percentage of the Population That Will Experience a Tax Increase in Tax Year
2019 Because of the 2017 Tax Act
State
Percentage
Rank5
New York
13 percent
1
Maryland
12 percent
2 (tied)
District of Columbia
12 percent
2 (tied)
New Jersey
11 percent
4
California
11 percent
5
Connecticut
9 percent
6
Texas
6 percent
33
Florida
5 percent
37
Kansas
4 percent
46
South Dakota
3 percent
49
North Dakota
2 percent
51
Source: ITEP Data https://itep.org/finalgop-trumpbill-ny/
29. In New York, thirteen percent of taxpayers will see a federal tax increase.6 For New
Jersey this figure is eleven percent; for Maryland, it is twelve percent; for California, it is
eleven percent; and for Connecticut, it is 9 percent. In contrast, only six percent of
Texans and only five percent of Floridians will see a tax increase in tax year 2019
because of the 2017 Tax Act. Thus, on a relative basis, more than twice as many New
Yorkers as Texans or Floridians will see a net tax increase because of the 2017 Tax Act. I
estimate that this difference is primarily due to the SALT Deduction Cap.
30. The relative impact of the 2017 Tax Act on the States can also be assessed by comparing
each State’s share of the federal tax base to each State’s share of the 2017 tax cuts.
31. As used herein, herein, “federal tax base” refers to the total amount of federal individual,
corporate income, and estate taxes received by the federal government under the law

5

In this table, States (including the District of Columbia) are ranked based on the
percentage of taxpayers who will experience a net tax increase because of the 2017 Tax Act. If
one State has a higher rank than another State in the table, that means a greater percentage of
taxpayers in the higher-ranked State will see a tax increase than in the lower-ranked State.
6

ITEP’s estimate on this point is relatively consistent with DTF’s own internal estimate
based on 2015 tax return data, which is that approximately 11% of New York taxpayers will
experience a tax increase under the 2017 Tax Act.
7

prior to the enactment of the 2017 Tax Act. “State share of the federal tax base” means
the percentage of all federal taxes contributed by each State’s taxpayers. A “State’s share
of the 2017 tax cuts,” or similar phrasing used below, refers to the share of the 2017 tax
cuts taxpayers in a State are estimated to receive. As used below, the term “tax cuts in the
2017 Tax Act” refers to reductions in federal individual income taxes, corporate taxes,
and estate taxes, as well as changes in treatment for pass-through business income, that
were enacted in the 2017 Tax Act. These tax cuts are described in state-by-state data
released by ITEP in December 2017.7
32. ITEP data enabled me to estimate each State’s share of the federal tax base. To determine
a State’s share of the tax base, I divided the Total Tax Change – which represents ITEP’s
estimate of the absolute dollar amount of tax cuts provided by the 2017 Tax Act for 2019
to taxpayers in each State – by the Tax Change as a Percentage of Pre-Tax Income –
which represents the Total Tax Change framed as a percentage of the State’s total tax
base prior to the 2017 Tax Act. In simple terms, if a State’s tax change was $100 in
absolute terms, and that $100 represented 2% of the State’s pre-tax income prior to the
2017 Tax Act, then the State’s tax base in this formula would be $5,000 ($100/.02). That
method yielded the following raw figures for certain States’ amount of the federal tax
base in 2019:
Federal Tax Base (Raw Estimates By State)
California
$2.03 trillion
Texas
$1.13 trillion
New York
$1.10 trillion
Florida
$1.06 trillion
New Jersey
$546 billion
Maryland
$314 billion
Connecticut
$235 billion
Source: ITEP data analyzed by New York State Department of Taxation and Finance

7

ITEP’s state-by-state estimates of the impact of the 2017 Tax Act provided columns
categorizing the Act’s tax cuts as “Families & Individuals”, “Estate Tax”, “Pass-Through
Businesses”, and “Corporations”. ITEP’s state-by-state estimates are available here:
https://itep.org/finalgop-trumpbill/.
8

33. The following table compares those raw figures to the overall federal tax base, imputed
from ITEP data.8
State Share of Federal Tax Base (By State)
California
13.5%
Texas
7.6%
New York
7.3%
Florida
7.1%
New Jersey
3.6%
Maryland
2.1%
Connecticut
1.6%
Source: ITEP data analyzed by New York State Department of Taxation and Finance
34. ITEP data also enabled me to estimate what percentage of the tax cuts in the 2017 Tax
Act goes to taxpayers in each State. For example, according to ITEP data, Florida
taxpayers will receive 8.6 percent of the tax cuts in the 2017 Tax Act, and Texas
taxpayers will receive 9.6 percent. These estimates are reflected in the table below:
States (including D.C.)
Alaska
South Dakota
Wyoming
Texas
Florida
Connecticut
Maryland
Minnesota
Oregon
California
New Jersey
New York

Percentage of 2017
Tax Cuts
0.3%
0.3%
0.2%
9.6%
8.6%
1.5%
1.9%
1.7%
1.2%
10.8%
2.9%
5.1%

35. Using the figures described in paragraphs 33 (share of tax base by State) and 34 (share of
tax cuts in 2017 Tax Act, by State), I was able to compare each State’s share of the
federal tax base to the distribution of tax cuts under the 2017 Tax Act.

8

DTF’s calculations based on ITEP data yield an overall federal tax base of $14.99

trillion.
9

36. This comparison is a method of assessing whether the 2017 Tax Act is skewed in favor of
or against certain States. For example, a bill reducing taxes proportionally across the
board would provide tax cuts in percentages matching (or very similar to) a State’s
baseline share of the federal tax base. In contrast, a bill favoring or disfavoring9 certain
States would not do so. Instead, as to favored States, such a bill would provide tax cuts
greater than those States’ baseline shares of the federal tax base. As to disfavored States,
such a bill would provide tax cuts less than those States’ baseline shares of the federal tax
base.
37. This comparison is done in the table below. A figure below 100 percent in the middle
column of the table below means a State’s taxpayers received relatively less from the
2017 Tax Act than the State’s share of the tax base. For example, if a State had ten
percent of the federal tax base, but the State’s taxpayers received only five percent of the
tax cuts in the 2017 Tax Act, then the middle column of the table would show 50 percent
(derived from dividing .05 by .10 and then converting the result to percentage form)—
suggesting the State’s taxpayers received only half as much as the State’s share of the tax
base would suggest they should receive. The impact of the bill will skew against that
State.
38. In contrast, a figure above 100 percent in the middle column of the table below means a
State’s taxpayers received relatively more from the 2017 Tax Act than the State’s share
of the tax base. For example, if a State had five percent of the federal tax base, but the
State’s taxpayers received ten percent of the tax cuts in the 2017 Tax Act, then the table
would show 200 percent (derived from dividing .10 by .05 and then converting the result
to percentage form)—suggesting the State’s taxpayers received twice as much as the
State’s share of the tax base would suggest they should receive. The impact of the bill
will skew in favor of that State.

9

By “favoring or disfavoring” I am referring solely to the mathematical impact of the
bill, and not to legislative intent.
10

Comparison of Each State’s Share of the 2017 Tax Cuts to Baseline Share of
Federal Tax Base
States (including
Percentage of Tax Cut
Rank10
D.C.)
/ Percentage of Tax
Base
Alaska
137 percent
1
South Dakota
134.1 percent
2
Wyoming
132.1 percent
3
Texas
127.2 percent
5
Florida
122.0 percent
7
Connecticut
93.1 percent
40
Maryland
88.6 percent
46
Minnesota
87.1 percent
47 (tied)
Oregon
87.1 percent
47 (tied)
California
79.8 percent
49
New Jersey
79.4 percent
50
New York
70.1 percent
51
Source: ITEP data analyzed by New York State Department of Taxation and
Finance
39. As reflected in the table above, taxpayers in States such as Alaska, Wyoming, Texas and
Florida receive between 22 and 37 percent more in tax cuts from the 2017 Tax Act than
their respective baseline shares of the federal tax base. Those States are in the top ten on
this metric.
40. In contrast, New York and New Jersey received between 20 and 30 percent less in tax
cuts from the 2017 Tax Act than their respective baseline shares of the federal tax base.
These States rank in the bottom three out of all States and the District of Columbia, and
New York ranks last.
41. Based on this data, I find that the 2017 Tax Act favors States such as Alaska, Wyoming,
Texas, and Florida and disfavors States such as New York and New Jersey.11

10

A higher rank in this table correlates with a State receiving relatively more from the
2017 Tax Act than the State’s share of the tax base.
11

By “favoring or disfavoring” I am referring solely to the mathematical impact of the
bill, and not to legislative intent.
11