Judge Throws Out States' Suit Challenging SALT Deduction Cap

Chris Gaetano
Published Date:
Oct 1, 2019

A federal judge has dismissed a case brought by the states of New York, New Jersey, Connecticut and Maryland that sought to overturn the $10,000 cap on state and local tax (SALT) deductions included in the Tax Cuts and Jobs Act. The plaintiffs essentially argued that the SALT deduction cap exceeds the federal taxation power by verging into territory that is constitutionally reserved to the states. The states presented the argument that the SALT deduction has a special historic status, such that any attempt to eliminate or substantially curtail it would upset the constitutional balance of state-federal power. Further, the states argued that the tax provision is essentially an unlawful attempt to intimidate states into changing their tax policies.

The judge, J. Paul Oetken, of the Southern District of New York, held in his opinion that the cap does not get in the way of states' authority to tax within their own limit, and therefore it does not represent the federal government intruding into state government matters.

On the second matter, Judge Oetken said that even if Congress did indeed intend to use the cap to force a policy change on the state level, that is within its rights to do so, noting that Congress uses all sorts of programs and incentives to guide state policies; he brought up, as an example, Congress' withholding of highway funds until states raised the drinking age to 21. While the plaintiffs said that the SALT deduction cap was less a gentle encouragement and more of a "gun to the head," the judge remained unmoved. 

"In essence, the States allege that the SALT cap will burden their taxpayers so heavily that the States will be compelled to adopt ameliorative policies in response," he said. "But the States have failed to show that the financial burden their taxpayers will experience as a result of the SALT cap is any more severe than the sort of burden that might accompany any other statewide economic disappointment."

New York Gov. Andrew Cuomo condemned the decision and said that New York and the other states are considering an appeal. 

"There is no doubt in my mind that President Trump's unfair tax policy targets New York and other blue states by funding tax cuts for corporations and the rich on the backs of New Yorkers," he said. "New York is already the largest 'donor state' in the nation—paying the federal government $36 billion more than we get back every year. The SALT cap takes this gross imbalance and supercharges it, costing New Yorkers another $15 billion each year. The bottom line is this policy is unprecedented, unlawful, punitive and politically motivated—and it must be stopped. We disagree with the court's decision and are evaluating all options including appeal."

This case is the first of two concerning the SALT cap that have been moving through the courts. This one concerns the existence of the cap itself. The other concerns the use of state-based nonprofit organizations that were developed to mitigate the impact of the SALT deduction cap; the IRS said that such donations do not rise to the level of a true charitable contribution and so cannot be counted for deductions against one's federal tax. 

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