Supreme Court Denies Challenge to SALT Deduction Cap

The high court issued an order on Monday, April 18, 2022, denying the request from New York, New Jersey, Maryland, and Connecticut to review a decision of the U.S. Court of Appeals for the Second Circuit regarding the SALT deduction cap. The appeals court rejected several state legal arguments against the cap, including that it unconstitutionally coerces the states to abandon their preferred fiscal policies. The cap generally blocks taxpayers who itemize federal deductions from deducting more than $10,000 per year for paid state and local taxes, including property taxes and either income or sales taxes.

The states argued that the cap unconstitutionally interferes with their sovereign authority to levy and collect property and income taxes. The Second Circuit rejected their arguments, finding that neither Article I of the Constitution nor the 16th Amendment bars Congress from curtailing the SALT deduction, even if citizens in certain states will pay billions of dollars in additional federal taxes. The appeals court ruled that such injuries are not significant enough to be coercive under the Tenth Amendment. Joe Bishop-Henchman, vice president of tax policy and litigation at the National Taxpayers Union Foundation, noted the states’ petition was meritless. Nothing about a deduction for the 12% who still itemize is constitutionally mandated. While it is true that high taxes can harm competitiveness, New York should solve the problem in Albany instead of in the federal courts.

When the SALT cap was enacted, there was no serious debate over its constitutionality. This did not stop several high-cost states that claimed to be targeted by the cap from challenging it. With their best chance, the Second Circuit rejected, the states decided to take it a step further and go to the Supreme Court, hoping the outcome would be different.

The Monday order leaves the cap in place. U.S. Rep. Bill Pascrell of New Jersey commented that his state’s delegation remains united to enact SALT reform through Congress this year. Pascrell and other law-makers have vowed to oppose any White House tax proposals that do not raise the $10,000 cap. Pascrell believes that critics of their push on SALT operate on incorrect assumptions. Law-makers like Pascrell say that SALT is not only about providing tax relief to the middle class, but it is about supporting their communities. New Jersey cities and towns directly rely on SALT to finance police, road-building, and public transit. A restored SALT cap would help provide the necessities communities rely on daily. Fellow New Jersey Rep. Josh Gottheimer slammed the deduction cap and urged the Senate to approve legislation raising it. Last year, the Build Back Better Act passed by the House included a cap increased to $80,000, but the Senate has not taken up the bill, which has effectively been declared dead. 

More than 20 states have enacted workarounds similar to those enacted on April 7 2022 in New York. The $220 billion New York law included adjusting state and local tax laws affecting the cap. The move allows more state residents to get the full benefit of a state workaround to the cap that gave partnerships, LLCs and S corporations an avenue to ease the cap’s impact on individuals’ federal deductions for paid state and local taxes. 

New York, New Jersey, and Connecticut have also sued, challenging Treasury Department regulations blocking a form of state SALT cap workarounds. The efforts involve tax credits offsetting many donations to state and local charitable funds. The rules blocked federal deductions for donations.

Talley’s team of tax professionals provide comprehensive tax compliance and consulting services so you can preserve, enhance, and pass on your assets and wealth to the next generation. We welcome the opportunity to discuss the current options available for you. For more information, contact us today.

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