Article

State and Local Tax Cap Not Unconstitutional

A district court has dismissed a lawsuit filed by four states (Connecticut, Maryland, New Jersey and New York) against the federal government

Learn More
< Back to Insights
Insights  <  State and Local Tax Cap Not Unconstitutional

A district court has dismissed a lawsuit filed by four states (Connecticut, Maryland, New Jersey and New York) against the federal government

A district court has dismissed a lawsuit filed by four states (Connecticut, Maryland, New Jersey and New York) against the federal government.  The four states were seeking declaratory and injunctive relief to eliminate the $10,000 federal personal income tax cap on state and local tax (SALT) deductions. U.S. District Judge J. Paul Oetken ruled that the federal deduction cap is not unconstitutional.   

Background

In 2017, President Trump signed into law sweeping tax reform legislation informally known as the Tax Cuts and Jobs Act (TCJA) (P.L. 115-97), which made several substantial amendments to the federal tax code. Among other things, the TCJA placed an upper limit of $10,000 on the amount a taxpayer may deduct from their federal tax income to offset those sums they have paid toward certain state and local taxes (the “SALT cap”). As enacted, the SALT cap is scheduled to expire at the end of 2025. 

District Court Opinion

In 2018, New York, Connecticut, Maryland and New Jersey filed suit against the IRS and Treasury alleging that the SALT cap violates the federalism principles that undergird the U.S. Constitution. The states’ primary concern stemmed from the claim that the introduction of the SALT cap could impair each of the states’ ability to pursue its own preferred tax policies. Judge Oetken of the U.S. District Court for the Southern District of New York ruled on September 30 that the SALT cap is not an unconstitutional infringement of state power. Judge Oetken noted that “the States are correct that the SALT cap is in some ways unprecedented” since “the availability of an uncapped deduction for state income and property taxes has been a mainstay of the federal income tax since the tax’s earliest inception.” But “the states have failed to persuade the Court that this novelty alone establishes that the SALT cap exceeds Congress’ broad tax power under Article 1, section 8 and the Sixteenth Amendment.”

Upcoming blumshapiro Webinar

Tax Cuts and Jobs Act: Where Are We Now?

Register Today

The cap, like any federal tax provision, will affect some taxpayers more than others and, by extension, will affect some states more than others. However, the cap, like every other feature of the federal tax code, is a part of the landscape of federal law with which states make their decisions as to how they will exercise their own sovereign tax powers, according to Oetken. Because the states failed to plausibly allege that the cap, more so than any other major federal initiative, meaningfully constrains this decision-making process, the district court had no basis for concluding that the SALT cap is unconstitutionally coercive.

Democrats on Capitol Hill Prepare to Move State and Local Tax Cap Repeal Bill

Meanwhile, Democratic lawmakers on Capitol Hill are preparing to move a SALT cap repeal bill. Specifically, Rep. Bill Pascrell (D-N.J.) and Senator Bob Menendez (D-N.J.) have proposed repealing the SALT cap and raising the top income tax rate from 37 percent to 39.6 percent. Additionally, Pascrell recently told reporters that House Democrats will likely propose a temporary repeal of the SALT cap as a “compromise.” At this time, however, any Democratic-backed measure to repeal or scale back the SALT cap is expected to fail in the Republican-controlled Senate.

 

Disclaimer: Any written tax content, comments, or advice contained in this article is limited to the matters specifically set forth herein. Such content, comments, or advice may be based on tax statutes, regulations, and administrative and judicial interpretations thereof and we have no obligation to update any content, comments or advice for retroactive or prospective changes to such authorities. This communication is not intended to address the potential application of penalties and interest, for which the taxpayer is responsible, that may be imposed for non-compliance with tax law. 

Continue the Conversation with Our Team
Get in touch with us.

Contact Us