On January 22, 2018, The Trentonian published the following Op-Ed, written by Pashman Stein Walder Hayden Partner James A. Plaisted. Excerpts of this article were originally published in The Trentonian.
Our new governor announced a call to arms to resist immoral initiatives of the Trump administration. A priority should be challenging the new tax amendments which discriminate against our state’s citizens. Taxing the same income twice is contrary to our federalist principles and jurisprudence. The new Trump tax scheme taxes money already taken by the state and local governments. For example, State income taxes in New York and New Jersey are withheld, not received and not available to the wage earner. The new Trump tax on phantom income, unavailable to the taxpayer, is just as unconstitutional as a federal tax plan designed to balance the budget by requiring all citizens who paid state or local taxes to pay the same amount to the federal government. While declaring a Maryland income tax unconstitutional, Justice Alito opined “Maryland does not offer a full credit against the income taxes that they (residents) pay to other states. The effect of this scheme is that some of the income earned by Maryland residents outside the State is taxed twice”
The citizens of states such as New Jersey, New York, and California have chosen a more progressive approach but are being financially penalized for that choice by lower tax states with more congressional representatives. Nothing could be less geographically uniform and therefore prohibited by the Clauses of the Constitution requiring uniformity of taxes throughout the states.
The 16th Amendment was passed to permit a direct federal tax on income. It is an exception to constitutional clauses requiring uniformity and pro rata division of taxes among the states. Taxes under the 16th Amendment have always, until now, meant net income. Congress’ first tax legislation to promulgate the policy behind the 16th Amendment created a “general tax” but state and local taxes were deducted from taxable income. Only “net income” after deducting state taxes have ever been taxed by the federal government pursuant to the 16th Amendment until now. The income tax as envisioned by the framers of the 16th amendment was a tax only on income net of state taxes and not a double tax levied a second time on the money the state takes from its citizens by force of law to fund the operation of the State and local governments. Draconian discrimination against the citizens of states who choose to fund more services with higher state taxes was not within the contemplation of the framers of the 16th Amendment or the Congress that enacted the laws to effectuate it.
States care for their citizens through police and fire protection, education and many other services, which vary from state to state. These services are funded by state taxes leaving net income for citizens. A federal tax on money paid to the state is a double taxation on income citizens cannot keep or use. It is a punitive and discriminatory tax. Different approaches by the various states are to be applauded and not made the subject of grossly invidious discrimination. The Tenth Amendment‘s reserves all rights not specifically granted to the Federal Government to the States. As our Supreme Court famously noted at the outset of our republic the power to tax includes the power to destroy. That power is being used to destroy citizens’ rights to choose different forms of state governance which was reserved to the States by the 10th Amendment.
The new Trump tax code lowers corporate tax rates from 35% to 21% but also allows corporations, and partnerships and real estate LLC’s to be taxed on “net income” after deducting state and local taxes as business expenses. Until now all federal income taxes were levied on net income for everyone not just citizens owning businesses. Citizens including wage earners, have a constitutional privilege to be taxed on a uniform basis without discrimination. This limitation of a traditional net income approach to wealthy real-estate and business owners benefits the members of the richest cabinet in history and already wealthy business owners but not wage earners.
The new tax amendments drastically undermine fundamental rights of citizens to tax uniformity and to independently choose state governance. It is a discriminatory tax aimed at states with different tax codes than those favored by lower tax states whose citizens have opted for less services, like education or medical benefits. An oppressive majority has opted to tax income never received nor available to citizens of blue states who have chosen higher local taxes and services. Citizens have fundamental rights and privileges to only be subjected to uniform taxes and immunity from discriminatory taxes under the Constitution.
This invidiously discriminatory federal tax scheme should be subjected to judicial scrutiny Limiting the deductions for state and local taxes is an affront to our federal system in which states and local governments are allowed to enact individualized laws for the benefit of their citizens, financed as they choose, without discrimination by the federal government. The Justices who have so zealously safeguarded State’s rights in different contexts should have the opportunity to strike down these offensive revisions to the tax code.
— James A. Plaisted, Partner- Pashman Stein Walder Hayden specializing in White Collar Criminal and Constitutional Law and an Alderman in Boonton New Jersey struggling with the impact of the new tax amendments on Boonton.