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SALT Cap Constitutional Challenge Faces Long Odds at Supreme Court



The 2017 Tax Cuts and Jobs Act (TCJA) substantially modified deductions in two major ways: (1) the standard deduction was nearly doubled from $12,700 for a married couple to $24,000, simplifying deductions for 30 million taxpayers; and (2) capping the state and local tax (SALT) deduction for those remaining itemizers at $10,000 per filer. The richest taxpayers couldn’t use the SALT prior to TCJA because the Alternative Minimum Tax (AMT) taxed away the benefits, while most other taxpayers now find it more beneficial to take the standard deduction post-TCJA. That means that changes to the SALT deduction were felt most acutely by high-income households in high-tax jurisdictions, like New York, New Jersey, Connecticut, and Maryland.

Not coincidentally, New York, New Jersey, Connecticut, and Maryland filed an appeal this week to the U.S. Supreme Court on their case arguing that the SALT cap is unconstitutional. They argue the cap is unprecedented, was intended to harm their states and therefore coercive toward state tax policies in violation of the Tenth Amendment, and that the Constitution mandates an unlimited SALT deduction. These arguments did not prevail with the U.S. District Court for the Southern District of New York or with the U.S. Court of Appeals for the Second Circuit, both of whom unanimously ruled against them, and are highly unlikely to succeed before the Supreme Court.

  • Unprecedented? As the Second Circuit noted, the 1944 introduction of the standard deduction sharply curtailed SALT deductions, the 1964 tax reform disallowed all but certain state and local taxes, and tax changes in 1986 and 2004 forced taxpayers to choose between deducting income or sales taxes but not both. The AMT and the “Pease” limitation also limited the ability of taxpayers to deduct SALT. Why would those changes be constitutional but not the 2017 SALT cap?

  • Constitutional mandate? The states’ petition warns that the SALT deduction “ensures that States can raise tax revenues in furtherance of sovereign state objectives without fear that the federal government will impose a tax on the same sources and thereby prejudice the State’s revenue collection.” But that just argues that all federal taxation of income (and business) is unconstitutional, as all taxes are on the same “sources”: taxpayers, who face dual obligations to federal and state. Whether governments tax people’s property, sales, or income, it’s still people writing the checks and bearing the economic burden of the taxes.

    While the Constitution as adopted did not allow for federal taxation of income as we know it today, that was changed by state ratification of the Sixteenth Amendment. So clearly it was envisaged that both federal and state governments would be taxing income, or the states would never have ratified that Amendment. Apparently several sponsors of the Sixteenth Amendment reassured New York state officials that they were not empowering the federal government to encroach on state taxing power. As I wrote in 2018, “If New York really believed that, that was foolish. They got sold the Brooklyn Bridge. It was obvious a federal income tax would affect state finances. Even if someone told them it wouldn’t, it’s not enforceable—what matters is what was passed, not what was allegedly promised.”

    The Second Circuit also observed that in South Carolina v. Baker (1988), the U.S. Supreme Court rejected an argument that Congress could not constitutionally impose federal income tax on state bond interest: “[T]he owners of state bonds have no constitutional entitlement not to pay taxes on income they earn from state bonds, and States have no constitutional entitlement to issue bonds paying lower interest rates than other issuers.”

  • Coercive? The states argue that Congress passed the SALT cap to “coerce Petitioners [states] to lower their tax rates and reduce public investments,” citing statements by Republican politicians observing that the uncapped SALT deduction had the effect of pushing up tax rates. (Before 2017, the Institute for Taxation & Economic Policy, a left-wing group, promoted income tax increases in blue states by promising that the federal government would pick up a third of the tab via the SALT deduction “federal offset.”) As evidence for “punishing” blue states, it’s thin, and five years in, none of the four states have presented evidence they cut income or property taxes at all, much less that the cap forced them to. The Second Circuit didn’t miss this either, finding at most New Jersey would lose $100 million over two years out of its $37 billion annual budget for 2019. (The state’s budget has since grown to $44 billion, cutting against the claim the SALT cap has forced a curtailment of public investments.) As for the argument that blue states were adversely affected, the court simply wrote that lots of federal laws have uneven benefits and burdens — Congress was aware of that and passed the SALT cap anyways.

As I often advise students, constitutional law is not just about what you think the Constitution says, but what you can draw from case law and past precedent to persuade a judge. I wish the Tenth Amendment was a lot stronger than it is, but even if it were, an argument that the Tenth Amendment forbids any federal action intruding on state sovereignty is a tough sell. The precedent is not helpful for the states: in 1941, the New Deal Court in United States v. Darby Lumber held that the Tenth Amendment is not, on its own, grounds for striking down a federal law, and that remains the law despite the best efforts of Chief Justice Rehnquist and Justice O’Connor (who dissented in South Carolina v. Baker).

I’ll be surprised if the Supreme Court accepts the case, but if they do, the states have an uphill climb. Just four of fifty states as plaintiffs is not the makings of a Tenth Amendment reinvigoration, and key problems are the inability to articulate harm after five years, the lack of favorable precedent, and the pervasive sense that the wisdom of the SALT cap is a political or legislative question, not a legal one.

The case is State of New York, et al. v. Yellen, currently docketed as U.S. Supreme Court No. 21A285. The lower court opinions are State of New York, et al. v. Yellen, 15 F.4th 569 (2d Cir. 2021) and State of New York, et al. v. Mnuchin, 408 F. Supp. 399 (S.D.N.Y. 2019). 

Joe Bishop-Henchman is Vice President of Policy & Litigation at National Taxpayers Union Foundation.