Blue States Ask Supreme Court to Review SALT Tax Deduction Caps

A video photo showing New York Gov. Kathy Hochul delivering a guidance about health worker quarantine at the Capitol on Dec. 24, 2021. AP/Screenshot via The Epoch Times

After losing in the lower courts, four Democratic-dominated northeastern states are asking the Supreme Court to consider their legal challenge to the cap on state and local tax (SALT) deductions imposed by then-President Donald Trump’s 2017 tax law.

The case is New York v. Yellen. Janet Yellen is being sued in her official capacity as secretary of the U.S. Department of the Treasury. New York, New Jersey, Connecticut, and Maryland asked the Supreme Court on Dec. 29, 2021, to extend the deadline for filing a petition for certiorari, or review, in the case from Jan. 3 to March 4. On Jan. 3, Justice Sonia Sotomayor granted the requested extension.

The states sued Yellen’s predecessor, then-Secretary of the Treasury Steven Mnuchin, and the IRS in July 2018 after the Tax Cuts and Jobs Act of 2017—a tax reform law that was backed by Trump—took effect.

The states claim that the SALT deduction cap is unconstitutional, but the argument has found no takers in the judicial system. A federal district court ruled against the states in 2019, and in October 2021, the U.S. Court of Appeals for the 2nd Circuit did the same.

The statute lowered tax rates, broadened the standard deduction and child tax credit, and limited the alternative minimum tax and various popular deductions, including the SALT deduction, which was previously unlimited. Most Americans actually received a net tax cut.

Some economists say that limiting the SALT deduction supports economic growth because it puts pressure on high-tax states, such as those participating in this lawsuit, to lower their tax rates. They also say it’s the fairer approach because it stops the residents of low-tax states from effectively subsidizing those in high-tax states.

Doing away with the deductibility of state and local taxes is positive because it eliminates the “federal distortion that enables punitive tax policy in states such as California, Illinois, New York, and New Jersey,” Veronique de Rugy, senior research fellow at the Mercatus Center at George Mason University, wrote in The Washington Examiner when Congress was debating the proposal.

Democrats currently have a proposal pending in Congress to increase the SALT deduction cap, which Republicans have called “a gigantic deduction for the rich living in high-tax states.”

Sen. Rick Scott (R-Fla.) said in December 2021 that the SALT deduction “is when a blue state like California, New York, Illinois, or New Jersey [that] have high state taxes want taxpayers from states with smaller budgets to pay a portion of their budgets.

“In a state like Florida, our budget is about half of what New York’s budget is per person,” Scott said. “They want our taxpayers to subsidize their taxes. ... All of our states with lower taxes should not be subsidizing all these ridiculous states that can’t live within their means.”

Taxpayers and government leaders in high-tax states complained after the cap was imposed and demanded its repeal, spurring years of court battles.

The four states stated in their petition to the Supreme Court that ever since the first federal income tax was levied in 1861, Congress had respected the states’ sovereign authority to collect taxes “by providing for a deduction of all or substantially all state and local property and income taxes ... from federal taxable income.”

But in 2017, “Congress severely curtailed the SALT deduction for the first time in history,” limiting the deduction by an individual to $10,000 of state and local taxes, regardless of the taxpayer’s actual state and local tax burden.

New York state officials weighed in on the issue.

“The SALT deduction cap is nothing less than double taxation on New Yorkers,” New York Gov. Kathy Hochul, a Democrat, said in a statement as she unveiled the petition to the high court.

“Repealing the SALT cap would not only put more money into the pockets of New York families, it would deliver a much-needed boost to New York’s economy. I am proud we are taking this issue to the Supreme Court to continue to fight on behalf of New York taxpayers.”

New York Attorney General Letitia James, a Democrat, also spoke out against the SALT deduction cap.

“This unfair cap has already placed a significant financial burden on countless hardworking, middle-class families in New York, and in the years to come, it is expected to cost New York taxpayers more than $100 billion,” James said.

“We filed this lawsuit to protect millions of New Yorkers from this harmful, misguided, and blatantly political attack. New York will not be bullied into paying more than its fair share, and we will continue to fight back.”

James and former New York Gov. Andrew Cuomo, also a Democrat, previously voiced a conspiracy theory about the deduction cap, claiming that it was a Republican dirty trick. The two claimed in November 2019 “that the SALT cap is a politically motivated bid to effectively raise property taxes in predominately Democratic states.”

“The Trump administration’s SALT policy is retribution politics—plain and simple,” Cuomo said at the time. “New York is already the nation’s leader in sending more tax dollars to Washington than we get back every year, and we will not allow this administration to pick the pockets of hard-working New Yorkers to fund tax cuts for corporations and send even more money to red states.”

The Epoch Times reached out for comment to U.S. Solicitor General Elizabeth Prelogar but hadn’t received a reply as of press time.