SALT Deduction Cap Falls Short in Design, Not Constitutionality

The latest defeat of a constitutional challenge to the state and local tax deduction cap underscores that the cap’s real defect isn’t that Congress lacked the power to enact it. It’s that Congress used its power to create a blunt, politically punitive tax rule that courts won’t save taxpayers (or Congress) from. The SALT cap should be restructured to address these design flaws.

The cap has always been a tax-policy Rorschach test. To its defenders, it was an overdue limit on a deduction that disproportionately benefits high-income taxpayers living in high-tax states. To its critics, it was a deliberate fiscal shot across the bow against those states.

Both arguments may have merits, but the SALT cap’s constitutionality has never been a serious question. Reform advocates should stop hunting for constitutional provisions that don’t exist and start forcing Congress to fix the rule it wrote.

In Sims v. United States, two New Jersey taxpayers argued that the cap violated the 10th and 16th Amendments, various principles of federalism, and a few other constitutional provisions. The US District Court for the District of New Jersey wasn’t persuaded, and it dismissed the claims. The court held that Congress has broad authority to tax income and define, limit, or deny deductions from that income.

That is a meaningful distinction, because it means the best way to challenge the cap is through narrowly tailored claims and political avenues. Courts aren’t rescuing taxpayers who are victims of legislative design failure, and Congress shouldn’t be allowed to hide behind the courts when the problem is policy-related.

TL;DR: Unfair isn’t the same thing as unconstitutional.

A narrower legal or administrative challenge could be more tenable than another broad constitutional assault on Congress’ power to pass a cap at all.

Photographer: Eric Lee/Bloomberg via Getty Images

The real angle of attack is political and administrative. Congress should stop conditioning relief on whether a taxpayer’s income comes through a favored pass-through entity or the apparently less important world of wages and sole proprietorships.

The pass-through entity tax workaround is the clearest example of the cap’s political and potential legal weakness. After the Tax Cuts and Jobs Act of 2017 capped the individual SALT deduction, many states created elective pass-through entity taxes that allow partnerships, S corporations, and similar entities to pay state tax at the entity level.

Because that tax is treated as a business expense for the entity, the owners can effectively receive the benefit of a federal deduction without bumping into the individual SALT cap.

That is a major policy distortion. Taxpayers whose income flows through the right kind of business structure get SALT relief, while many wage earners, sole proprietors, and individual taxpayers remain stuck behind the cap. Two taxpayers can live in the same state, earn similar income, and bear similar state tax burdens, but receive different federal treatment because one spun up the right entity and the other received a W-2.

This is where a narrower legal or administrative challenge could be more tenable than another broad constitutional assault on Congress’ power to pass a cap at all. The relevant question would be whether the Treasury Department’s treatment of pass-through entity taxes creates or blesses an arbitrary distinction that is difficult to square with the cap’s policy purpose.

But that is exactly the kind of problem Congress and the Treasury should be forced to confront head-on. If SALT relief is available only to taxpayers with the right entity wrapper, the cap is selectively porous depending on taxpayer sophistication.

With the original cap, individuals could only deduct so much in state and local taxes. The pass-through workaround complicates that story—and leaves the cap standing for some while quietly allowing others to route around it.

Congress recognized at least part of the problem in last July’s massive tax package, as it raised the cap from $10,000 to $40,000. But the fix is temporary, only modestly indexed at 1% per year, and still doesn’t fully address the cap’s structural inequities.

The marriage penalty is the most obvious remaining flaw in the hands of Congress. The $40,000 cap for a married couple is a rude fix when it treats a household worse than two similarly situated unmarried taxpayers, who would enjoy twice that figure. Tax burdens don’t magically become cheaper because two people file jointly, and Congress should at least aim for a change that doesn’t penalize marriage through bad arithmetic masquerading as neutrality.

The SALT cap phaseout presents an additional problem. A cap that phases down as income rises is defensible as distributional policy, but a poorly designed phaseout can create arbitrary marginal-rate spikes, or cliffs, where earning another dollar triggers a disproportionate loss of deduction value.

Tax policy shouldn’t reward gamesmanship in which shaving off a few dollars of income saves thousands of dollars in tax liability.

A better change would make the higher cap permanent, index it meaningfully, double it for joint filers or otherwise eliminate the marriage penalty, smooth the phaseout to avoid cliffs, and require the Treasury to revisit and rationalize the treatment of pass-through entity taxes.

This is where Sims is useful even if it didn’t break new ground. The court didn’t discover some novel constitutional principle hiding in the SALT deduction. It affirmed that if the SALT cap is bad, Congress owns it. Courts can say what the Constitution allows, but they can’t make Congress write or revise tax provisions with care, coherence, or mercy. That job belongs to the lawmakers—and voters.

The case is Sims v. United States, D.N.J., 21-1120, decided 5/28/26.

Andrew Leahey is an assistant professor of law at Drexel Kline School of Law, where he teaches classes on tax, technology, and regulation. Follow him on Mastodon at @andrew@esq.social.

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