A federal appeals court has upheld the $10,000 federal deduction limit on state and local tax payments, finding states’ constitutional claims lacked merit.
New York, New Jersey, Maryland, and Connecticut unsuccessfully argued that the SALT cap—established in the 2017 tax law—violates the Tenth and Sixteenth amendments.
Tuesday’s Second Circuit opinion, authored by Judge Raymond A. Lohier, upheld the legality of the deduction limit. The court decided that the unlimited deduction that was available before 2017 isn’t mandated by the U.S. Constitution and that the cap doesn’t unconstitutionally infringe on state sovereignty.
The ruling means people who pay more than $10,000 a year in income, personal property, and other taxes to their state and local governments still won’t be able to fully deduct those payments on their annual federal returns.
The states, led by New York, wanted the court to stop the Treasury Department from enforcing the cap, which they claim increases the effective cost of state and local property taxes and makes home-ownership more expensive for their residents. Democratic lawmakers have argued Republicans unfairly targeted blue states in their tax code overhaul.
“It is obviously true that members of Congress were aware that the SALT deduction cap would adversely affect some States more than others,” Lohier wrote in the opinion. “But the SALT deduction cap is not unlike the countless federal laws whose benefits and burdens are unevenly distributed across the country and among the several States.”
Despite the setback, the states have the option of asking the Second Circuit to reconsider or petitioning the U.S. Supreme Court to get involved. Beyond the courts, Democrats on Capitol Hill have shown an interest in lifting the cap, and several states have figured out how to offer small business owners a way around the $10,000 limit.
Democratic lawmakers from New York, New Jersey, and other high-tax states are trying to ease the SALT cap in the tax-and-spend package under negotiation in Congress. Talks recently focused on a possible two-year repeal of the deduction limit, but the need to cut down the size of the spending package will make that more difficult to fit in.
Tuesday’s opinion affirmed a 2019 ruling by the U.S. District Court for the Southern District of New York.
Judges Robert D. Sack and Denny Chin joined Lohier in the opinion.
The New York State Attorney General’s Office and the Treasury Department didn’t immediately respond to requests for comment.
The case is New York v. Yellen, 2d Cir., No. 19-3962, 10/5/21.