Supreme Court won’t hear challenge to SALT tax deduction

The Supreme Court on Monday declined to review a challenge to the $10,000 ceiling imposed on the state and local tax (SALT) deduction, one of the most controversial provisions of the 2017 tax bill ushered into law by President Trump and a GOP Congress.

The court’s move, which came in a brief unsigned order without noted dissent, effectively ended a legal challenge brought by a number of high-tax, Democratic-led states.

The Republican-led tax cuts capped at $10,000 the amount of state and local taxes that individuals could deduct from their federal income taxes, a move that effectively increased the tax burden on high-earners in states like New York and California. 

Efforts to remove the cap were a divisive issue among Democrats last year as they crafted a budget reconciliation package — which eventually stalled over opposition from Sen. Joe Manchin (D-W.Va.). Democrats from some of the districts and states most affected by the change sought to eliminate or raise the ceiling on deductions, while other Democrats argued that would largely benefit wealthy households.

The limit on the SALT deduction was one of the biggest revenue-raising provisions of the 2017 Tax Cuts and Jobs Act. It was needed to offset tax cuts in order to meet the House reconciliation requirement that the legislation contribute no more than $1.5 trillion to the federal deficit over the 10-year budget window.

In response, four states — New York, Connecticut, Maryland and New Jersey — brought a legal challenge in 2018, claiming the tax-deduction cap amounted to congressional overreach and an infringement of states’ rights.

Attorneys general for those states argued that “a deduction for all or a significant portion of state and local taxes is constitutionally required because it reflects structural principles of federalism embedded in the Constitution.”

The lower courts rejected the states’ argument, finding that the deduction was not constitutionally protected, prompting the states’ ultimately unsuccessful petition to the Supreme Court.

The Treasury Department last month urged the court to turn away the blue states’ request for appeal.

“Congress has acted well within that power both in establishing, and in placing limits on, the deduction for state and local taxes,” the department told the justices in court papers. “As the courts below observed, no constitutional provision compels Congress to provide any SALT deduction, let alone a deduction of a particular amount.”

“Only about 9 percent of households would benefit from repeal of the Tax Cuts and Jobs Act’s (TCJA) $10,000 cap on the state and local property tax (SALT) deduction,” Howard Gleckman, an analyst with the Tax Policy Center, a Washington think tank, wrote in a brief. “More than 96 percent of the tax cut would go to the highest-income 20 percent of households. The top 1 percent of households, those making $755,000 or more, would receive more than 56 percent of the tax cut. TPC estimated repeal would reduce federal tax revenues by $620 billion between 2018 and 2028.”

In an interview, Gleckman said the court’s move was “not a surprise.”

“This always was a long shot. New York and the other states claimed that by capping the SALT deduction the federal government was limiting their authority to set their own taxes. But the SALT deduction is a federal provision that Congress can adjust as it chooses. Its impact on state taxation is only indirect,” he said.