State Of New York et al v. Mnuchin et al

Filing 47

DECLARATION of Owen T. Conroy in Support re: 44 CROSS MOTION for Summary Judgment .. Document filed by State Of Connecticut, State Of New York, State of Maryland, State of New Jersey. (Attachments: # 1 Exhibit 1, # 2 Exhibit 2, # 3 Exhibit 3, # 4 Exhibit 4, # 5 Exhibit 5, # 6 Exhibit 6, # 7 Exhibit 7, # 8 Exhibit 8, # 9 Exhibit 9, # 10 Exhibit 10, # 11 Exhibit 11, # 12 Exhibit 12, # 13 Exhibit 13, # 14 Exhibit 14, # 15 Exhibit 15, # 16 Exhibit 16, # 17 Exhibit 17, # 18 Exhibit 18, # 19 Exhibit 19, # 20 Exhibit 20, # 21 Exhibit 21, # 22 Exhibit 22, # 23 Exhibit 23, # 24 Exhibit 24, # 25 Exhibit 25, # 26 Exhibit 26, # 27 Exhibit 27, # 28 Exhibit 28, # 29 Exhibit 29, # 30 Exhibit 30, # 31 Exhibit 31, # 32 Exhibit 32, # 33 Exhibit 33, # 34 Exhibit 34, # 35 Exhibit 35, # 36 Exhibit 36, # 37 Exhibit 37, # 38 Exhibit 38, # 39 Exhibit 39, # 40 Exhibit 40, # 41 Exhibit 41, # 42 Exhibit 42, # 43 Exhibit 43, # 44 Exhibit 44, # 45 Exhibit 45, # 46 Exhibit 46, # 47 Exhibit 47, # 48 Exhibit 48, # 49 Exhibit 49, # 50 Exhibit 50, # 51 Exhibit 51, # 52 Exhibit 52, # 53 Exhibit 53, # 54 Exhibit 54, # 55 Exhibit 55, # 56 Exhibit 56, # 57 Exhibit 57, # 58 Exhibit 58, # 59 Exhibit 59, # 60 Exhibit 60, # 61 Exhibit 61, # 62 Exhibit 62, # 63 Exhibit 63, # 64 Exhibit 64, # 65 Exhibit 65, # 66 Exhibit 66, # 67 Exhibit 67, # 68 Exhibit 68, # 69 Exhibit 69, # 70 Exhibit 70, # 71 Exhibit 71, # 72 Exhibit 72, # 73 Exhibit 73, # 74 Exhibit 74, # 75 Exhibit 75, # 76 Exhibit 76, # 77 Exhibit 77, # 78 Exhibit 78, # 79 Exhibit 79, # 80 Exhibit 80, # 81 Exhibit 81, # 82 Exhibit 82, # 83 Exhibit 83, # 84 Exhibit 84, # 85 Exhibit 85, # 86 Exhibit 86, # 87 Exhibit 87, # 88 Exhibit 88, # 89 Exhibit 89, # 90 Exhibit 90, # 91 Exhibit 91, # 92 Exhibit 92, # 93 Exhibit 93, # 94 Exhibit 94, # 95 Exhibit 95, # 96 Exhibit 96, # 97 Exhibit 97, # 98 Exhibit 98, # 99 Exhibit 99, # 100 Exhibit 100, # 101 Exhibit 101, # 102 Exhibit 102, # 103 Exhibit 103, # 104 Exhibit 104, # 105 Exhibit 105, # 106 Exhibit 106)(Conroy, Owen)

Exhibit 25

The Deductibility of State and
Local Taxes
Sarah F. Liebschutz

State University of New York, College at Brockport
and
Irene Lurie

State University of New York at Albany

President Reagan's tax reform proposals of May 1985 recommended eliminating the deduc
tion of state and local taxes in computing federal taxable income. Arguments for and again

deductibility appeal to equity for taxpayers facing levies from multiple governments and to conce

for the roles and responsibilities of governments in afederal system. Intense criticism and lo

bying against the president's proposal was spearheaded by New York. The debate was so

recast to emphasize the impact of change on other states, especially in the Northeast and Midwes
and the potential widespread negative effects on government services, especially education. T
broadened base of opposition to change was sufficient to sustain deductibility in the bill pass
by the House of Representatives in December 1985, illustrating that a cohesive lobbying effo

invoking the concept of federalism as a partnership can be fashioned by appealing to sta
on the basis of the negative consequences of change.

The deduction of state and local taxes in calculating income subject to the

federal income tax came under intense scrutiny in 1985. President Ron
Reagan pressed for elimination of this "most sacred of cows"' even whi

interest groups organized for its retention. At issue were competing historica

philosophical, and economic claims about the proper structure of taxati
in a federal system. The major arena for activity was the Congress, whe

the legislative struggle made for odd bedfellows. At the end of 1985, the Hou

of Representatives, after active intervention by the president, enacted t
reform legislation that left intact the practice of deducting state and lo

taxes. The future of deductibility, however, remained clouded in the absenc
of Senate action on tax reform in 1985.

State and local taxes, along with federal taxes, were the only deductions
specified in the Revenue Act of 1862, the country's first income tax, enacted
to finance the Union effort in the Civil War. What was the original rationale
for such deductions? What have been the arguments over the years for and

'Harvey E. Brazer, "The Deductibility of State and Local Taxes Under the Individual Income Tax," U.S. Congress, House, Committee on Ways and Means, Tax Revision Compen
dium, vol. 1, 1959, p. 407.
Publius: The Journal of Federalism 16 (Summer 1986)

51

This content downloaded from 149.10.125.20 on Tue, 20 Nov 2018 19:02:26 UTC
All use subject to https://about.jstor.org/terms

64 Publius/Summer 1986

tually deducted (representing only 1

ditures) is sensitive to changes in the t
ending deductibility would reduce spen

ly, the president chose to cite this e
STRATEGIC RESPONSES

Public debate about the repeal of state and local tax deductio

distinct forms during 1985. The debate at first revolved about th

of a single state, New York. The participants in the debate we
leading officials, including the governor and members of t
delegation in the Congress, on the one hand, and top federal
cluding the president and several of his key advisors, on the

the debate agenda was broadened to center on a wider set of inte

cut across all states. The National Coalition Against Double Taxationrepresenting local governments and states, education groups, and labor
unions-helped to advance those interests in lobbying efforts in the Congress.

The battle was joined when President Reagan stated in an interview that
he had "no sympathy for high-tax states trying to protect their wealthy tax-

payers."34 Treasury Secretary Regan asserted, "My heart will not break if
New Yorkers lose the right to deduct billions in state and local taxes from
their taxable incomes.'""
New York's Governor Cuomo became a leading and highly visible
spokesperson for the retention of deductibility-despite public and private
concerns that his posture was a risky one, both for his own political future
and for the ultimate resolution of the deductibility issue.36 His involvement

was part of a strategy to activate support for retention of state and local
tax deductibility both inside New York and across the country.
The governor's calls for vigilance in the face of "tax restructuring pro-

posals that would work, unfairly, to the serious detriment of New
Yorkers,"37 were part of the "inside" strategy. His strong position helped

to stimulate bipartisan unity among officials within New York. The
Republican majority leader of the state senate, the state comptroller, the

mayor of New York City, and many local officials testified at hearings conducted by U.S. Senator D'Amato around the state during June and July 1985.
One urban county executive contended that "the net effect of the Treasury's

proposal would be that the cost of providing local services would go up at
a time when the federal government wants to shift more responsibility
down."38 The Republican leadership of the state senate even sponsored a
331bid., pp. 58-59.
341nterview on Cable News Network, 1 December 1984.

35"Drop Dead Again," The New York Times, 4 December 1984.
36See Mary McGory, The Washington Post, 23 June 1985.
37Mario M. Cuomo, "State of New York Annual Budget Message 1985-1986" (Albany: 22
January 1985), p. m9.
38Lucien A. Morin, "The Effect of Repeal of the State and Local Tax Deduction on Monroe
County and Its Residents," U.S. Congress, Joint Economic Committee, Hearings, 24 June 1985.

This content downloaded from 149.10.125.20 on Tue, 20 Nov 2018 19:02:26 UTC
All use subject to https://about.jstor.org/terms

State/Local Tax Deductibility 65

resolution in June 1985 proposing that the U.S. Co
to require the deduction of state and local propert
sales taxes in calculations of income for federal in

The fact that deductibility was a high personal prior

was critical in promoting solidarity among the st
Congress-a delegation normally characterized as an
The governor's strong position, communicated by l
the delegation, was followed by a request that th
resolution crafted by Representative Raymond J.
from Long Island and member of the Ways and M
resolution declared deductibility "essential to the w
income Americans, state and local governments and the housing industry."40 Thirty-two of the thirty-four House members from New York
agreed to cosponsor it.
The New York strategy was also, and more critically, directed toward the

national arena, namely the Congress, where the decision about the fate of
deductibility would occur. With the support of the New York delegation
secured, Governor Cuomo moved to broaden the base of his appeal outside
the state. Speaking before national audiences, he evoked the principles of
federalism as partnership:
The administration's proposal to repeal deductibility overturns a central idea
at the heart of our republic-that we are one nation, not fifty nations, and
that we are strongest when we stand together and help each other. .... The
most dangerous thing about the proposed tax plan is that it would divide our

house.41

Recasting the terms of the debate was a key tactic of the New Yorkers
at the forefront of the battle to preserve deductibility. Their goal was to
downplay deductibility as a "New York" issue that pitted high-tax states
against low-tax states, high-income itemizers against persons with lower incomes, and, instead, to emphasize the widespread negative effects on government services that might result from ending deductibility. Their basic argu-

ment was that repeal of deductibility would produce "irresistible taxpayer
pressure to cut state and local taxes, resulting in reduced government
services."42

Such negative effects were projected to occur disproportionately in the
Northeast and Midwest regions of the nation and in the field of public educa-

tion. The Northeast-Midwest Congressional Coalition in the House of
Representatives, representing eighteen states, took a firm position against
39James Barron, "The New York Delegation," New York State Today, ed. Peter Colby
(Albany: State University of New York Press, 1985), pp. 203-210.
40House Resolution 105.
41Mario M. Cuomo, Testimony before the House Committee on Ways and Means, 17 July

1985.

42Clark, National Journal, 29 June 1985, p. 1510.

This content downloaded from 149.10.125.20 on Tue, 20 Nov 2018 19:02:26 UTC
All use subject to https://about.jstor.org/terms

66 Publius/Summer 1986

repeal of state and local tax deductib
an unfair and disproportionate burde
The coalition estimated that "with 4

[Northeast and Midwest] taxpayers wou

of eliminating the deduction for non-b

estimate was derived from data indic
states rely most heavily on revenues

perty taxes, while states least hard hit

energy severance taxes that "would b

remain deductible."45 An unlikely sour
Northeast-Midwest Coalition came from the Western Governors' Association which feared that "ending deductibility might bring about potentially
explosive regional tax warfare. . . . Elimination of deductibility could rekin-

dle efforts by those [Northeast and Midwest] states to limit the ability of
states [rich in natural resources] to levy and collect severance taxes."46
Besides estimating the regional disparities flowing from repeal of deductibility, the national strategy emphasized how it would reduce public services.

While many services could be affected, including public safety and public
health, the major target for service cuts was thought to be education. About

36 percent of all state and local expenditures are earmarked for education.
As noted earlier, the effects of repeal of deductibility on revenues for public

education could be expected to be especially large. Concern about the effects of repeal was shared by all major lobby groups for public education,
including the American Federation of Teachers, the National Education
Association, and the National School Boards Association. These lobby
groups, together with others representing organized labor, state legislators,
county officials, mayors, and providers of services to the poor, joined forces

under the aegis of a broader coalition called the National Coalition Against
Double Taxation.47

Within this coalition, the action group known as SALT-D (State and Local
Taxation-Deductibility) was concerned with developing awareness of the implications for public education of repealing deductibility. A two-pronged ef-

fort was launched, with the single goal of rallying a broad cross section of
localities and states to lobby members of Congress to retain deductibility.
The first prong involved broadening the argument about regional effects.
To do this, the SALT-D action group generated data for each state concern-

43Northeast-Midwest Congressional Coalition, "Fact Sheet, State and Local Tax Deductibility," 12 September 1985.
441bid.

45Ibid.

46Clark, National Journal, 29 June 1985, p. 1514.
47The National Governors' Association (NGA) was alone among major state associations that
did not officially join the National Coalition Against Double Taxation. While the NGA adopted
a position opposing outright elimination of the deduction, it did signal its willingness, on 26
February 1986, to "consider some limited modification of the . .. tax expenditures that benefit
state and local government."

This content downloaded from 149.10.125.20 on Tue, 20 Nov 2018 19:02:26 UTC
All use subject to https://about.jstor.org/terms

State/Local Tax Deductibility 67

ing relative reliance on sales, property, and income ta

education. The second prong of the SALT-D effort foc

ing public and private education. Albert Shanker, pres

Federation of Teachers, in testimony before the

Committee, contended that it would be unfair to cont
to take deductions for charitable contributions to priv
tions while at the same time repealing the deduction f

to aid public education.48

By fall 1985, the president and his treasury secretar

a well constructed coalition of interests, with New
The president viewed deductibility as the linchpin of

It was necessary as a base-broadening element to ac

outcome, and it was equitable, in his view, for it woul
of special advantage to wealthy taxpayers in high-tax

residents gain more from deductibility than the resid

countered with a strategy geared to build support for

emphasized that deductibility is not a New York is

Its repeal would generate negative effects on taxpayer

Midwest, not just in New York, and on public educ
STRANGE BEDFELLOWS

The course of tax reform in the House of Representatives was anyt
smooth. Between May 1985, when the president's Tax Proposals for

Growth and Simplicity were introduced, and 17 December 1985
House passed the Tax Reform Act of 1985 (H.R. 3838), the pro
characterized by fits and starts and unexpected outcomes. The
initiative, in fact, was compared to "'the target bear' in a shoot
It gets hit. It rises, pauses, turns a bit-and then it keeps goin
The principal actors and allies on tax reform were President R
Dan Rostenkowski (D-Ill.), chairman of the House Ways and M

mittee. Although their imputed motivations differed, tax reform
priority for each. The president viewed tax reform as an issue with

appeal, one with the potential to enlarge the base of suppo

Republican party.50 Chairman Rostenkowski, whose aspirations
Thomas P. O'Neill as Speaker of the House of Representatives in

widely known, viewed his successful management of tax reform in

and, after Senate passage, in the Conference Committee, as a signif

toward outdistancing Majority Leader James C. Wright, Jr. (Drace for the Speaker's office.5'

48U.S. Congress, House, Committee on Ways and Means, Summary of Testi
Comprehensive Tax Reform Proposal of the President, 99th Cong., 1st sess.,
49Dick Kirschten, "White House Notebook," National Journal, 21 December 1
50Ronald Reagan, Radio Address, April 1985.
51Richard E. Cohen, "Democrats, GOP Wary of Long Term Political Fallo
Reform," National Journal, 8 June 1985, p. 1347.

This content downloaded from 149.10.125.20 on Tue, 20 Nov 2018 19:02:26 UTC
All use subject to https://about.jstor.org/terms

68 Publius/Summer 1986

Agreement between Chairman Rostenk
importance of tax reform, however, d
House of Representatives. Tax politics is
interests and incremental outcomes;52 c
ficult challenges for the politician wh

Rostenkowski initiated the process by pr

to the Ways and Means Committee on
bill modified many aspects of Treasury

tax brackets. The Chairman's main

to preserve tax policy principles, but
tion in the Ways and Means Commit
One such modification involved the deduction of state and local taxes.

Rostenkowski staked out a middle ground between Treasury II-which proposed total repeal of these deductions-and the New York delegation-which
advocated total retention. He proposed repealing the deduction for sales and
personal property taxes and limiting the deduction for income and real pro-

perty taxes. Taxpayers would be allowed to deduct $1,000 in state and local
income and real property taxes ($500 for unmarried individuals) or the amount
of such taxes exceeding 5 percent of their adjusted gross income, whichever
is greater.53

This modification on deductibility was offered by Chairman Rostenkowski

both to enhance federal revenues and to mollify New York. However, the
three New Yorkers on the committee-Charles B. Rangel (Democrat),

Thomas J. Downey (Democrat) and Raymond McGrath (Republican)viewed the Chairman's modification as an unacceptable incursion into the
present law. Retention of current state and local deductions was the price
that these three members demanded for support of tax reform.

Under the chairman's direction and with the participation of Treasury
Secretary Baker, the Ways and Means Committee worked in closed session
for two months. The process involved both atypical and typical elements.
Atypical was the use of task forces-on pensions, housing, taxable bonds,
business entertainment- whose members were carefully selected by
Rostenkowski to craft various tax legislation details. Typical was the bargaining among committee members that led to trade-offs on issues across regions.
New York committee members used data on losers and gainers, such as those
in Table 1, in their efforts to gain allies. Downey, who had campaigned against

the oil depletion allowance when first elected to Congress in 1974, found
himself supporting oil drilling incentives in return for support of deductibility

by committee members from Texas and Oklahoma. It was, in the words of
one observer, "classic down-in-the-dirt legislative politics." The process produced what Rostenkowski himself said was "not a perfect law. But politics,"
52See John F. Witte, "Democratic Procedures and Tax Policy," in Joseph A. Pechman, A
Citizen's Guide to the New Tax Reforms (Totowa, N.J.: Rowman and Allanheld, 1985).
53Congressional Quarterly Weekly Report, 28 September 1985, p. 1913.

This content downloaded from 149.10.125.20 on Tue, 20 Nov 2018 19:02:26 UTC
All use subject to https://about.jstor.org/terms

State/Local Tax Deductibility 69

he acknowledged, "is an imperfect process."54 In
forts of Governor Cuomo and the National Coali
tion were successful: the Ways and Means Comm
23 November 1985 retained full deductibility fo
Despite the "strange bedfellows" coalition of t
and the Democratic chairman of the House Way
tax reform did not yield bipartisan unity. On the f
five of the thirteen Republicans joined all twen
Republican leadership of the House, in fact, activ
Means bill, charging that it fell far short of the pr
ty, fairness, and economic growth. They were also
ministration's efforts to push a tax overhaul bill th
the reluctance of party members.56 Eliminating th
local taxes apparently played no role in the oppositi
Republicans to the Ways and Means Committee
been a partisan issue in the committee debate, a
in the floor debate in the House. Rather, the su
Republican minority members centered on provisio

believed, would dampen the climate for business

The opposition of the Republican minority was de

on 11 December 1985, when 164 of 178 Republi

Democrats, voted against a rule that would have allo
and Means Committee bill on the floor of the House. The rule was defeated

by a vote of 202-223; "Republican leaders . . . declared victory.'"58
That "victory" was short-lived. President Reagan, after meeting personally
with Republican House members and then promising in a letter to them that
he would veto any tax bill that failed to meet specific minimum requirements
for tax reform,59 succeeded in inducing fifty-six additional Republicans to
vote for the rule when it was reintroduced on 17 December. The rule carried

54"Ways and Means Finishes Tax Code Overhaul," Congressional Quarterly Weekly Report,
30 November 1985, p. 2483.
55Chairman Rostenkowski's concession on deductibility was reported to have "stunned his
colleagues. When Representative Thomas Downey, a New York Democrat expressed his surprise to Rostenkowski, the chairman said, 'I was always going to give you state and local taxes.'
Replied Downey, 'If you were, you deserve an Academy Award,"' Time, 11 November 1985,
p. 68.

56"GOP Defeats Attempt to Consider Tax Bill," Congressional Quarterly Weekly Report,

14 December 1985, p. 2613.

57See David E. Rosenbaum, "House Committee Completes Draft for Tax Revision," The

New York Times, 24 November 1985 and "Companies Upset by Tax Bill," The New York Times,
26 November 1985.

58"GOP Defeats Attempt to Consider Tax Bill," Congressional Quarterly Weekly Rep
14 December 1985, p. 2613.
59These requirements were "a full $2000 personal exemption for both itemizers and

itemizers, basic tax incentives for American industries, a minimum tax which allows no individ
or business to escape paying a fair share of the overall tax burden, a rate structure with a

imum rate no higher than in my proposal, and tax brackets that are fully consistent with

desire to reduce taxes for middle-income working Americans." The New York Time

December 1985.

This content downloaded from 149.10.125.20 on Tue, 20 Nov 2018 19:02:26 UTC
All use subject to https://about.jstor.org/terms

70 Publius/Summer 1986

by a vote of 258 to 168. The Ways a

a voice vote, and the matter of tax refo

tion. However, whether the deductio
main intact or, indeed, whether the
tion at all remained a matter of spe
CONCLUSION

President Reagan's tax reform initiative in 1985 was intended, acc
the president, to produce fairness, growth, and simplicity in the

federal income tax structure. At the same time, it provoked a nation

on basic premises of American federalism. The debate was stimulated

president's proposal to eliminate the deduction of state and local
computing federal taxable income. Such deductibility-an accepted
since the Civil War-was long assumed to be an appropriate incenti
states to tax themselves as partners with the federal government in

ing to national needs and in implementing national goals.
Public justifications for eliminating the deduction included its e
inefficiencies and disproportionate benefits to higher income tax
high-tax states. The more pragmatic reason for elimination wa
revenues to compensate for proposed cuts in federal tax rates.
Lobbying against elimination of deductibility was spearheaded
York, a high income and high spending state whose residents sto

the biggest losers. The New York strategy, articulated by its governo
intended to activate support in other states by downplaying deductib

a New York issue and emphasizing instead its disproportionately

effects on states in the Northeast and Midwest, and its potential wid

negative effects on government services, especially education. The bi

cohesion of New York officials and members of Congress in opp

any compromise on full state and local tax deductibility, together wi

"nationalizing" of the issue, led to a defeat for the president on
in the House Ways and Means Committee and in the House as a
What does the action in the House of Representatives tell us ab
state of American federalism? First, it suggests that such traditi
tices as the deduction of state and local taxes are not sacrosanct w
collide with a need for enhanced federal revenues. Second, it sugg
perspectives diverge on the role of state governments vis-a-vis ea

Third, it suggests that the perspective of federalism as partnership m

when a cohesive lobbying effort is fashioned to appeal to other
the basis of negative consequences of change.

This content downloaded from 149.10.125.20 on Tue, 20 Nov 2018 19:02:26 UTC
All use subject to https://about.jstor.org/terms