New York’s official state motto is “Excelsior,” which means “Ever upward,” and that’s an apt description of how the state — along with Connecticut, Maryland, and New Jersey — has attempted to persuade the federal courts to enshrine the state and local tax deduction a feature of federal tax law.
Undaunted by the fact that both the Second Circuit and the U.S. District Court for the Southern District of New York agreed that Congress’s decision to cap the SALT deduction in the Tax Cuts and Jobs Act is constitutional, the states are now urging the Supreme Court to hear their claim that an uncapped SALT deduction is “essential to prevent the federal government from interfering with the States’ sovereign authority to level and collect property and income taxes.”
Except that the deduction isn’t, and the Supreme Court shouldn’t.
The states’ framing of their request makes it clear that they should be unsuccessful in their application for certiorari. And they should knock it off already with the appeals to “sovereign authority.” Sovereign authority isn’t impinged on by the SALT deduction limitation. The petitioner states remain as free to set their own tax policies under the SALT deduction limitation enacted in 2017 as they were before it.
The limitation only makes it more politically difficult for state legislators to enact higher taxes because the federal government is refusing to blunt the impact of tax increases above the $10,000 threshold. But state legislators’ political interests are far from coextensive with the states’ sovereign interests, and in this case, the states have completely confused the two.
The states assert that the Supreme Court should hear the case because the SALT deduction limitation “presents a novel and important question about the limits of federal taxation power.” The SALT deduction is “not merely a matter of congressional grace,” the states insist. (Tell that to the Supreme Court in White v. United States, 305 U.S. 281 (1938), which explained that “every deduction from gross income is allowed as a matter of legislative grace.”)
No indeed, say the states, the unadulterated deduction is necessitated by federalism principles. Evidently federalism in this context means that the states get to demand a subsidy from the federal treasury for their state taxpayers.
The states contend that the Second Circuit got the “structural federalism” point wrong because it said the question is whether the federal government has a constitutional obligation to protect taxpayers from the true costs of paying their state and local taxes.
As proof that Congress can’t encumber the SALT deduction with a $10,000 limit, the states assert that the legislature has never before imposed a meaningful limit on the deduction, citing that as evidence of congressional belief that the deduction is constitutionally required. Except that Congress has imposed limits, including ones with a significant impact on many taxpayers — for example, by making the deduction unavailable to non-itemizers and payers of the alternative minimum tax.
The Supreme Court might be doing the state petitioners a favor if it declines to grant cert. Oral arguments and an opinion have the potential to damage the future of lawsuits pitched to the court of public opinion rather than the federal courts.
These types of cases are a net drag on the judicial system regardless of which states bring them, and this could be a convenient vehicle in which to contain them somewhat. Although the issue is politically charged, the real beneficiaries of what New York, Connecticut, Maryland, and New Jersey are asking for are taxpayers with relatively high incomes, and even Democrats representing those states have criticized lifting the SALT deduction cap.
However, the Supreme Court probably won’t grant cert, even though it would be a win for state taxpayers everywhere if political showcases became more difficult for states to pursue.