Noonan’s Notes Blog is written by a team of Hodgson Russ tax attorneys led by the blog’s namesake, Tim Noonan. Noonan’s Notes Blog regularly provides analysis of and commentary on developments in the world of New York tax law.

Courts Ruled on the SALT Cap Litigation

The outcome is disappointing for the states, but perhaps not surprising. For those of you who have not been following the SALT cap litigation, here’s a quick recap. We covered news of the original SALT cap lawsuit here. Several states teamed up to take on the federal government. They filed a complaint arguing that the SALT cap is unconstitutional noting that the cap: (1) was enacted to target New York and similarly-situated states; (2) that it interferes with states’ right to make their own fiscal decisions, and (3) it disproportionately harms taxpayers in those states. In 2018, the federal government moved to dismiss the SALT cap suit, which we covered here. The states then filed a cross motion for summary judgment on December 14, 2018. Later, on July 17, 2019, more states brought a second SALT cap lawsuit, and you can read about it here.  A few months later, on September 30, 2019, Judge J. Paul Oetken of the U.S. District Court for the Southern District of New York stated that the cap is not unconstitutionally coercive. Judge Oetken held that the states had not plausibly alleged that the cap meaningfully constrained their decision-making processes. Ultimately, in late 2019, the states involved - New York, Connecticut, Maryland, and New Jersey - appealed the decision of the District Court judge to the Second Circuit. We covered the appeal here. Now, fast forward to the present, and we finally have a decision on the appeal.

The 3-0 panel decision, issued October 5, found that the states’ challenge lacks merit, and that Congress did not go beyond its 16th Amendment taxing powers by limiting deductions under the TCJA. U.S. Circuit Judges Robert D. Sack, Denny Chin, and Raymond J. Lohier Jr. sat on the panel for the Second Circuit. Circuit Judge Lohier said, the states did not show that their injuries were significant enough to be coercive. He called the SALT cap one of “countless” federal laws whose benefits and burdens are distributed unevenly among states, and said it had an “outsized effect” on the four states because they benefited most from the SALT deduction. He explained, the Court does not intend to minimize the states’ losses, but they “find it implausible that the amounts in question give rise to a constitutional violation.”

Does this decision signal the end of the line for the states? On the litigation front, it probably does. It’s doubtful the Supreme Court would intervene on this. Since the suit was filed, dozens of states have enacted SALT cap workarounds, which from the beginning we felt was the better approach to deal with the SALT cap than this litigation. Of course, the SALT cap could go away soon, or at least be raised, as part of new tax plans that could be put in place this year or next. So never a dull moment! Stay tuned for more updates.

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