Supreme Court Rejects Blue States Challenge to Provision of Trump’s 2017 Tax Cut Law

The U.S. Supreme Court rejected an appeal on Monday from a number of Democrat-run states that sought to challenge a 2017 tax law signed by then-President Donald Trump capping local taxes that can be deducted from federal taxable income.

The group of states led by New York, which includes Connecticut, New Jersey, and Maryland, had attempted to strike down a portion of the tax law known as the “SALT cap,” which limits residents in those states to deduct just $10,000 of their state and local property and income taxes.

The states argued that the cap unconstitutionally encroached on their taxing authority.

“Congress’s taxing authority (as set forth in Article I, Section 8, and the Sixteenth Amendment) is cabined by the structural requirements of federalism, which prevent the federal government from directly interfering with the States’ ability to generate revenue to sustain their operations,” the states argued in their March court filing.

“The long history of federal income taxation demonstrates that Congress and the States equally understood that a deduction for all or nearly all state and local property and income taxes was constitutionally required to preserve state sovereign taxing authority.”

The nation’s highest court did not give a reason for refusing to hear the case.

Fox News reports:

The SALT cap was passed by Congress during former President Donald Trump’s administration, and the Biden administration continued to defend it as this case went on. 

The current Democrat-controlled House passed a bill in 2021 that would temporarily raise the cap to $80,000 until 2031, when it would go back to $10,000. The Senate has yet to take action on the bill, although a separate plan in the Senate led by Sen. Bernie Sanders, I-Vt., would cap the tax break by income, making it unlimited for individuals earning about $400,000 and phasing it down above that amount.

Republicans have criticized the bill, saying it would disproportionately benefit ultra-wealthy Americans in blue states.

The current SALT cap is set to expire after 2025.

An analysis from the Lyndon Baines Johnson School of Public Affairs at the University of Texas argued in October that Trump was correct about the SALT cap.

“Democratic leadership broadly supports maintaining the cap. Meanwhile, a coalition of twenty Democrats and nine Republicans have formed the State and Local Taxes Caucus —threatening the passage of President Biden’s infrastructure and tax priorities if all the proposals exclude a SALT cap repeal,” the analysis noted.

“Representative Josh Gottheimer (D-NJ) – one of the repeal’s staunchest proponents – remarked that reinstating previous SALT deductions would be a boon for ‘struggling families.’

“Yet the deductions disproportionately benefit the wealthy. Under a full repeal, the top 1 percent of households would receive an average tax cut of at least $35,000— compared to a paltry $37 for their middle-class counterparts,” the analysis continued, nothing further that it’s a “phenomenon is a function of our tax code structure.”

The analysis went on to note that typical deductions in states like New York prior to the cap, residents there claimed an average SALT deduction of more than $23,800. Extrapolating that across the state means that Albany is losing out on significant revenue at a time when New York and other states have seen the sharpest income declines in the past 25 years, mostly due to fallout from the pandemic.

As such, “diverting any revenue to the wealthy” at this point “does not make economic sense,” the analysis said.

A separate op-ed published in Politico in October also argued that repealing the SALT cap limit would make hypocrites out of Democrats who say they care about equity and racial inequality:

Reinstating the full deduction would make a hypocrite of any Democrat who claims to care about income inequality or systemic racism. That’s because the deduction is one of the biggest drivers of inequality in blue states.

In fact, unlike most debates in Congress, this one doesn’t actually pit red states against blue states. Rather, it pits the interests of wealthy blue districts against less wealthy ones. That’s why liberals who care about inequality and systemic racism should be willing to let go of the deduction.