Four states have petitioned the U.S. Supreme Court to take up the issue of federalism as it applies to the federal cap on state and local tax (SALT) deductions. In their petition, the attorneys general of New York, New Jersey, Connecticut, and Maryland argue that the lower court’s decision to dismiss the case did not sufficiently address the federalism issue.
More specifically, the states say the flawed decision by the 2nd U.S. Circuit Court of Appeals to dismiss their contention that the coerciveness of the $10,000 cap violates the 10th and 16th amendments of the U.S. Constitution.
The petition, which was joined by Treasury Secretary Janet Yellen, states that the SALT cap, enacted as part of the Tax Cut and Jobs act, harms the residents of the four states by increasing their federal tax liability and raises the cost of homeownership. States are adversely impacted because the cap is costing them hundreds of millions of dollars typically generated from property and real estate transfer taxes. In addition, the affected states have come under pressure to reduce state taxes resulting in the elimination of many public programs.
At Issue: Federalism and Encroachment of States’ Sovereignty
At issue is whether Congress exceeded the limits of federal taxation power by curbing the SALT deduction, and whether the imposition of the federal income tax infringes upon the states’ sovereign taxation powers.
The petition goes on to contend that the SALT cap is “unconstitutionally coercive” as it specifically targeted certain states for the purpose of pressing them to change their tax and spending policies. It makes specific reference to statements made by Republican congressional members to use the cap to influence the fiscal policies of Democratic led states.
The petition also took issue with the conclusion by the 2nd Circuit stating that Congress has the power to change the cap as they see fit, adding that “The SALT deduction is not merely a matter of congressional grace” as it is based in “the structural limitations place on the federal government by basic federalism principles of the Constitution.”
We will be monitoring the petition’s progress on behalf of our clients who have been materially impacted by the SALT Cap.