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.

SALT Cap Lawsuit Brought by Four States against Federal Government Is Dismissed

The lawsuit commenced July 2018 when four Democratic states banded together to curtail the SALT cap which was instituted as part of President Trump’s Tax Cuts and Jobs Act of 2017. The states alleged, among other things, that: 1) the SALT cap targeted New York and similarly-situated states by disproportionately harming taxpayers in those states; 2) it interfered with the states’ rights to make their own federal tax decisions and 3) it violated the 10th Amendment, the 16th Amendment and Article 1, Section 8 of the U.S. Constitution. Known as “the SALT cap lawsuit” because the new SALT deduction “caps” at $10,000 the amount of state and local tax that a married couple filing jointly can deduct from their federal taxes, we first covered it here and provided you updates here as the suit progressed over the past year. After the four states filed their complaint in July 2018, the government moved on November 2, 2018 to dismiss the action for lack of jurisdiction and failure to state a valid legal claim. The states then opposed the motion and filed a cross motion for summary judgment. Briefing was complete as of March 22, 2019 and the Court heard the parties’ oral arguments on the motions on June 18, 2019.

In a thorough 37-page opinion and order tracing the historical underpinnings of the SALT cap, Judge Oetken relied primarily on the U. S. Supreme Court’s decision in South Carolina v. Baker which concluded that nothing in the Constitution prohibited Congress from doing away with the exemption that it had previously offered as a matter of grace. Judge Oetken ultimately stressed that “ [i]n the end, Congress enacted the SALT cap pursuant to its broad tax powers under Article I, section 8 and the Sixteenth Amendment. The cap, like any federal tax provision, will affect some taxpayers more than others and, by extension, will affect some states more than others. But the cap, again like every other feature of the federal Tax Code, is a part of the landscape of federal law within which states make their decisions as to how they will exercise their own sovereign tax powers.” The Court further explained that “the States have cited no constitutional principle that would bar Congress from exercising its otherwise plenary power to impose an income tax without a limitless SALT deduction.” Judge Oetken underscored the notion that “the states remain free to exercise their tax power however they wish.”   

What this means for federal taxpayers is that the SALT cap deduction pursuant to IRC Section 164(b)(6) remains limited to $10,000 for a married couple filing jointly until tax years beginning on January 1, 2026. Although Judge Oetken took issue with the four states’ estimates of how much the SALT deduction cap increases their taxpayers’ federal tax bill, it was because of the manner in which the states calculated the estimates, not because the SALT cap won’t have an impact on budget coffers. The fact remains that the SALT cap causes actual financial impact since capping how much taxpayers can deduct means they will pay more federal taxes. Nearly 11 million taxpayers were affected by the cap on SALT deductions on the taxes they filed in 2019 and could lose out on a cumulative $323 billion, according to a February estimate from the U.S. Treasury’s Inspector General for Tax Administration. Conversely, repealing the SALT cap would significantly reduce federal revenues by $673 billion from 2019 to 2028 according to a recent study. And every state is impacted in a different way, too. New York faced a shortfall of $2.3 billion in revenue and Governor Andrew Cuomo said in mid-April that it was because of this federal law that limits income-tax deductions to $10,000 for state and local taxes.

We may not have seen the end of the SALT cap lawsuit. The four states are not satisfied with Judge Oetken’s dismissal. Calling the cap “unprecedented, unlawful, punitive, and politically motivated,” New York Governor Andrew Cuomo (D) in a September 30 statement said that the state is evaluating its options, including an appeal. According to Attorney General Letitia James (D), New York filed the suit “to protect our residents from the cap on the state and local tax deduction, an invasive and unprecedented attempt by the federal government to curtail our states’ constitutional rights.” She also noted that her office remains committed to defending the state and its taxpayers.

Likewise, Connecticut Attorney General William Tong (D) said in a September 30 statement that the cap “is an abusive and discriminatory tax hike” on Connecticut. “This disappointing decision makes it harder for our state to protect its taxpayers from the disproportionately harmful effects of Trump's tax law. We are in close coordination with other impacted states to consider next steps,” Tong said.

As we say in so many SALT blogs regarding amendments to tax laws, or as here, concerning a legal battle -- stay tuned! An appeal may be around the corner.

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