A federal judge in New York made short work of the lawsuit filed by New York, New Jersey, Connecticut and Maryland seeking to block one aspect of the Tax Cuts and Jobs Act signed by President Trump in 2017.
The states challenged the law because it capped at $10,000 the amount of state and local taxes (dubbed SALT) that could be deducted from IRS filings. Previously the wealthy in high-tax states could deduct most state and local taxes, meaning the taxpayers in lower-taxed states, such as Nevada, were paying a disproportionate share of federal taxes.
New York, for example, points out in its filings in the lawsuit that prior to the $10,000 cap its taxpayers who itemized deductions claimed an average SALT deduction of nearly $22,000. The other three states estimated their taxpayers in 2018 paid $7.5 billion more to the IRS than they had prior to the cap.
The Democrat-dominated states argued that since the tax law passed without a single Democrat in Congress voting for it and was signed by a Republican president that its true purpose was “to coerce a handful of States with relatively high taxpayer-funded public investments — States that are primarily Democratic leaning — to change their tax policies.”
In his 37-page opinion U.S. District Court Judge J. Paul Oetken dismissed the state’s contention that the tax reform unconstitutionally coerces the sovereign states to lower their taxes. In fact he cited a Supreme Court opinion in the case of South Dakota v. Dole, in which the court said it is permissible for Congress to withhold federal highway funds from states that failed to raise the legal drinking age to 21. Sounds like the definition of coercion.
Judge Oetken wrote, “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.”
He later wrote that he declined to speculate on Congress’ motives for passing the SALT deduction cap.
“So even if, as the States contend, Congress enacted the SALT cap in order to exert downward pressure on state and local tax rates, such a motive poses no constitutional problem as long as the states remain free ‘not merely in theory but in fact’ to set their own tax policies,” the judge concluded.
While the four high-tax states view the tax reform as coercive, the rest of the states tend to view the SALT cap as rectifying a long-standing inequity.
Nevadans — along with residents of New Hampshire, Florida, Wyoming, Texas, South Dakota and Alaska — used to be able to deduct about 1 percent or less of their adjusted gross income, while those who live in New York, Maryland, D.C. and California could deduct more than 5 percent. Nearly one-third of the additional federal tax dollars generated by the SALT cap comes from Californians and New Yorkers.
Using 2010 statistical data from the IRS, you find Californians who filed for state and local income tax deductions claimed deductions of $10,700 per return. Nevadans who filed for the state and local sales tax deduction claimed only $1,430 per return. Calculated on a per capita basis, Californians claimed $2,116 in federal income tax deductions, while Nevadans claimed only $166 per person for SALT deductions.
“The cap, like any federal tax provision, will affect some taxpayers more than others and, by extension, will affect some states more than others,” Judge Oetken wrote. “But the cap, again like every other feature of the federal Tax Code, is a part of the landscape of federal law within which states make their decisions as to how they will exercise their own sovereign tax powers.”
The tax reform is far more fair to a majority of the states that maintain at least some modicum of tax restraint.