The Supreme Court decided on April 18 not to hear an appeal from New York and three other Democrat-dominated Northeastern states that were challenging the cap on state and local tax (SALT) deductions imposed by President Donald Trump’s 2017 tax law.
According to its usual practice, the high court didn’t provide reasons why it refused to take up the case.
The Biden administration urged the court not to hear the case.
“Congress has acted well within that power both in establishing, and in placing limits on, the deduction for state and local taxes,” the federal government said in a brief last month. As the lower courts found, “no constitutional provision compels Congress to provide any SALT deduction, let alone a deduction of a particular amount.”
The four states in July 2018 sued Yellen’s predecessor, then-Secretary of the Treasury Steven Mnuchin, and the IRS after the Tax Cuts and Jobs Act of 2017 took effect—a tax reform law that was backed by Trump. The cap was one of the largest revenue-raising provisions in the legislation.
“The SALT deduction cap is nothing less than double taxation on New Yorkers,” New York Gov. Kathy Hochul, a Democrat, said when the petition was filed with the Supreme Court.
The states claimed that the SALT deduction cap was unconstitutional, but this argument found no takers in the judicial system. Specifically, the states had argued that Congress’s imposition of a $10,000 cap on the deduction of state and local property and income taxes from federal taxable income violates Article I, Section 8, as well as the 10th and 16th Amendments to the U.S. Constitution.
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 received a net tax cut, according to the Tax Foundation.
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.
After the Supreme Court ruled, Howard Gleckman, an analyst at the Tax Policy Center, told The Hill newspaper that he wasn’t surprised by the new ruling.
“This was always a long shot,” Gleckman said.
“New York and the other states claimed that by capping the SALT deduction, the federal government was limiting their authority to set their own taxes. But the SALT deduction is a federal provision that Congress can adjust as it choose. Its impact on state taxation is only indirect.”
