Treasury Defends SALT Deduction Cap Against N.Y.-Led Lawsuit

June 9, 2020, 4:31 PM

Congress was within its constitutional rights to rein in a deduction for state and local tax payments in the 2017 tax code overhaul, the Treasury Department told the Second Circuit in a court filing.

The Trump administration is defending the $10,000 SALT cap from an appeal brought by New York, Connecticut, Maryland, and New Jersey. The limit has drawn the ire of congressional Democrats and some state governors, who argue that it targets high-tax blue states.

The states want the U.S. Court of Appeals for the Second Circuit to overturn a 2019 federal district court ruling to dismiss their case. The states argued in their appeal that the U.S. Constitution requires Congress to “provide a deduction for all or nearly all state and local income and property taxes to ensure that the federal government does not crowd states out of traditional sources of revenue and thereby interfere with their sovereign taxing authority.”

The Treasury Department, in a brief filed Monday, countered that the SALT cap isn’t unconstitutional merely because it affects the landscape states face when choosing how to exercise their taxing powers.

“Congress is free to change its mind in this regard, and indeed could repeal the SALT deduction entirely without constitutional consequence,” Treasury said.

Treasury also argued that the district court should have held that the states didn’t have the right to bring their lawsuit in the first place. It reasoned that their argument about getting less tax revenue wasn’t the type of direct and specific harm required to establish legal standing.

The department added that a law known as the Anti-Injunction Act, which generally blocks lawsuits trying to restrain tax assessment or collection, also prohibits the states’ lawsuit.

The case is New York v. Mnuchin, 2d Cir., No. 19-3962, brief filed 6/8/20.

To contact the reporter on this story: Aysha Bagchi in Washington at abagchi@bloombergtax.com

To contact the editors responsible for this story: Patrick Ambrosio at pambrosio@bloombergtax.com; Colleen Murphy at cmurphy@bloombergtax.com

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