Tax Law’s Cap on State and Local Deductions Is Upheld by Court

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Congress didn’t unconstitutionally penalize Democratic-leaning states when it imposed a cap on federal deductions for state and local taxes, a federal judge ruled Monday.

The 2017 federal tax law, which President Trump signed after a party-line vote in Congress, limited to $10,000 the state and local tax payments that families can write off on their federal income taxes if they itemize deductions.

The provision, known as the SALT cap, disproportionately affected residents of wealthy, high-tax states, where residents are more likely to have state tax bills that exceed the $10,000 limit.

Four states, including New York, last year sued the federal government, arguing that the cap was an “unconstitutional assault” on their sovereignty.

But in a ruling Monday, a Federal District Court judge in Manhattan rejected that argument.

“The court recognizes that the SALT cap is in many ways a novelty,” the judge, J. Paul Oetken, wrote in his decision. “But the states have failed to persuade the court that this novelty alone establishes that the SALT cap exceeds Congress’s broad tax power.”

The other states joining in the suit were New Jersey, Connecticut and Maryland.

The cap on state and local tax deductions, which had previously been unlimited, was one of a handful of provisions intended to offset the cost of trillions of dollars in tax cuts included in the 2017 law. The Joint Committee on Taxation, Congress’s nonpartisan scorekeeper on tax matters, estimated the cap and related provisions would raise close to $700 billion in revenue over 10 years.

Independent analyses have found that even in high-tax states like New York, most residents received at least a modest tax cut under the 2017 law. Other provisions of the law, such as the reduction in marginal tax rates, offset the loss of the deduction for many families.

The state and local tax issue is in some ways an awkward one for Democrats, because they are trying to restore a tax break that primarily benefited relatively high earners. In 2017, before the cap took effect, households earning $200,000 or more accounted for roughly half of the nearly $600 billion in state and local tax payments deducted on federal tax returns.

But Democrats argue that the SALT cap penalizes states with progressive tax policies because it effectively makes state and local taxes more expensive for residents. That could make it harder for states to raise taxes, particularly on wealthy residents, and could increase pressure to cut spending. In their lawsuit, the four states argued that the SALT cap amounted to a coercive effort by the federal government to push certain states to change their tax policies.

Many Democrats suspected a political motive. Gov. Andrew M. Cuomo of New York has described the law as an “economic missile” aimed at families in his state. Mr. Cuomo and other governors from predominantly Democratic states have tried to engineer ways for their residents to escape the cap, so far largely without success.

The New York attorney general’s office, the lead plaintiff in the case, had no immediate comment on the ruling.

Judge Oetken said he would not “speculate on Congress’s motives in passing the SALT cap.” But in any case, he said, it didn’t matter — Congress is allowed to try to influence state policies, and a law isn’t unconstitutional just because it affects some states more than others.

“The states have failed to show that the financial burden their taxpayers will experience as a result of the SALT cap is any more severe than the sort of burden that might accompany any other statewide economic disappointment,” he wrote.

Daniel Hemel, a professor of tax law at the University of Chicago, said he wasn’t surprised that the court rejected the states’ argument. He noted that Congress had limited the state and local tax deduction in the past, albeit indirectly, through policies such as the alternative minimum tax.

“The states’ constitutional challenge to the SALT cap was a long shot from the start,” Mr. Hemel wrote in an email. “Supporters of the SALT deduction need to convince the next president (or a critical mass of Congress) that the deduction is a desirable feature of federal income tax law. They were never going to convince a federal judge that the SALT deduction is constitutionally ordained, though.”

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