A U.S. district judge today dismissed a lawsuit brought by Connecticut, Maryland, New Jersey and New York against the big tax cut signed into law by President Trump in December 2017. Judge J. Paul Oetken has been a U.S. District Judge for the Southern District of New York since President Obama appointed him in 2011.
The case, State of New York, et al v. Steven T. Mnuchin, considered the constitutionality of the $10,000 limit per filing household on state and local tax (SALT) deductions in the Tax Cuts and Jobs Act. In bringing the suit, New York’s Democratic Gov. Andrew Cuomo complained that “The elimination of the SALT deduction (state and local tax) was an economic attack on Democratic states.”
Judge Oetken’s 37-page ruling makes is clear that the federal government can tax as it wishes, within the bounds of the Constitution.
And he notes that:
Even absent an uncapped SALT deduction, though, states remain free to exercise their tax power however they wish. To be sure, the SALT cap, like any other feature of federal law, makes certain state and local policies more attractive than others as a practical matter. But the bare fact that an otherwise valid federal law necessarily affects the decisional landscape within which states must choose how to exercise their own sovereign authority hardly renders the law an unconstitutional infringement of state power.”
No doubt, the judge’s decision will be appealed—it’s politics, after all. The governors and legislators from Connecticut, Maryland, New Jersey, and New York can choose to tax and spend whatever they believe is best for their states and their political careers, it’s just that now taxpayers in other parts of the nation won’t be subsidizing their high taxes through the federal tax code.
In 2016, the average SALT deduction claimed by individual filers who itemized their tax deductions was $19,563 in Connecticut, $13,089 in Maryland, $18,092 in New Jersey, and $21,779 in New York. While most taxpayers in those states saw a tax cut, some higher-earning taxpayers received a smaller tax break than similarly situated taxpayers in states with a lower state and local tax burden. The average SALT deduction claimed in 2016 was $12,542.
Gov. Cuomo contended that the tax cut was a “…an economic attack on Democratic states.” Federal employment data shows he might have a point. Since the tax cut law was signed, the 27 states with average SALT deductions of less than $10,000 (thus, unaffected by the cap), were experiencing private sector job growth at double the rate of the 23 states with SALT deductions higher than $10,000.
Prior to the 2017 tax code change, the 27 low-tax states had a modest private sector advantage over their high-tax peers, seeing 14.5% job growth in the nine years prior to the federal tax cut, compared to 10.7% growth in the high-tax states. Thus, the low-tax states held a 35.1% employment growth advantage over the period.
But since the tax cut’s enactment, low-tax states have seen their employment growth advantage over high-tax states skyrocket to an astounding 108.3% advantage, almost three times the employment growth edge in the nine years before the tax cut. But, to Gov. Cuomo’s concern, it’s not that the high-tax states aren’t growing—they are—it’s just that they’re not experiencing job growth as rapidly as their low-tax counterparts.
There’s a fix for that, of course, New York, California, and the rest of the high-tax states can cut taxes and spend less. Or not. Either way, it’s their choice in our federal system. That jobs and opportunity flow to those states where entrepreneurs, small business owners, and prudent risk takers can keep a little more of their money as they create jobs, is their choice too.
Turning Gov. Cuomo’s remarks on their head, “Democratic states economically attack business”—why should anyone be surprised when jobs go elsewhere?