3 May 2022

SALT cap challenge is denied Supreme Court review

By Paul Bonner

April 18, 2022


The U.S. Supreme Court declined Monday to review an appellate case that upheld the $10,000 limit on the amount of state and local taxes (SALT) that can be claimed as a deduction on individual federal income tax returns.

The Court's order list included a denial of certiorari for New York v. Yellen, No. 21-966 (U.S. 4/18/22), letting stand the Second Circuit's opinion in the case last October (No. 19-3962 (2d Cir. 10/5/21), aff'g No. 18-CV-6427 (S.D.N.Y. 9/30/19)).

New York, joined by Connecticut, Maryland, and New Jersey, had sued the United States, Treasury, and the IRS, and their respective secretary and commissioner, soon after the enactment of the limitation by the law known as the Tax Cuts and Jobs Act (TCJA), P.L. 115-97.

Sec. 164(b)(6), added by the TCJA, for tax years 2018 through 2025, limits the itemized deductions for personal property taxes, state or local taxes, foreign taxes, and state and local sales taxes in lieu of state and local income taxes to $10,000 per year ($5,000 if married filing a separate return) (the SALT cap).

The four states, which said their residents were among the nation's taxpayers most likely to claim a SALT deduction exceeding $10,000, alleged that the SALT cap violated the U.S. Constitution's principles of federalism under the Tenth and Sixteenth Amendments and exceeded Congress's taxing power under Article I, Section 8. Specifically, they claimed in their suit that a balance of power between the states and federal government depended upon preserving the SALT deduction's special historical status, a balance upset by the cap's "targeted coercion" compelling them to alter their own tax policies. Alternatively, they argued, the SALT cap unlawfully impeded them and other states from exercising their sovereign powers.

A federal district court denied the states' arguments, finding the SALT cap was validly enacted and was not unconstitutionally coercive toward them.

In their appeal to the Second Circuit, the states again argued that the SALT cap violated the Tenth Amendment in that it coerced them to abandon their preferred fiscal policies by either lowering their own taxes or cutting spending. Alternatively, they argued, it violated the principle of equal sovereignty among the states by affecting them disproportionately.

Like the district court, the Second Circuit held that the SALT cap did not unconstitutionally violate the Tenth Amendment.

As for the SALT cap's disparate effect, the states cited Shelby County v. Holder, 570 U.S. 529 (2013), in which the Supreme Court held unconstitutional a coverage formula of the Voting Rights Act as it was applied to states. However, the Second Circuit said, the Court's holding in Shelby County was not based on its differing application among states "but because it did so based on facts that, in the majority's view, were outdated and no longer true."

In addition, while Congress surely knew the SALT cap would affect some states more adversely than others, the cap is nonetheless like other federal tax laws in that respect and was within Congress's permissible legislative purpose of influencing, while not compelling, tax policy, the Second Circuit stated. Thus, it held, the SALT cap also did not violate the principle of states' equal sovereignty.

— To comment on this article or to suggest an idea for another article, contact Paul Bonner at Paul.Bonner@aicpa-cima.com.