On Sept. 30, a federal district court dismissed a challenge by four states (New York, Connecticut, Maryland and New Jersey) to the $10,000 cap on the federal state and local tax (SALT) deduction that was created by the Tax Cuts and Jobs Act. (New York et. al. v. Mnuchin, No. 18-CV-6427). The states alleged that the SALT cap “violates the federalism principles that undergird the U.S. Constitution.” They pointed out that the cap will result in a significant increase to federal tax bills of residents in their states and that it disproportionately affects the residents of high-tax states whose state and local taxes exceed the $10,000 cap. And, they alleged that Republican legislators and the Republican president intended this differential result to force states to provide a disincentive for these states to impose high tax rates.
Court Rejects Argument
Although it recognized that the states had standing to bring the lawsuit, the court ruled that the states didn’t prove that the SALT cap exceeds the broad tax power of Congress. The court also rejected the states’ argument that the SALT cap was designed to force targeted states to bring their tax policies in line with the preferences of the federal government. It noted that Congress has the power to impose federal taxes without a limitless SALT deduction, and courts typically won’t look into “hidden motives” of Congress when exercising this power.
According to James Dougherty, a partner at Withers Worldwide, "This ruling was to be expected. While practitioners and states continue to find ways to minimize the impact of certain provisions of the 2017 reform, such as the SALT deduction limitation, a constitutional solution never appeared to be a viable solution. The SALT deduction was never entirely unfettered given that it was effectively limited by the alternative minimum tax, so the argument that it was unconstitutional to further limit the deduction was not persuasive."
Appeal Being Considered
According to an article in the New York Times, New York Governor Andrew Cuomo is considering an appeal.
