Taxes

Federal Court Rules Against Blue-State Lawsuit Challenging Constitutionality of Cap on Federal Tax Deduction for State and Local Tax Payments

The court rejected the four states' claims that the cap on the SALT deduction enacted in the 2017 tax act violated the Tenth Amendment and "coerced" states.

|The Volokh Conspiracy |

In July 2018, four blue states—New York, Connecticut, Maryland, and New Jersey—filed a lawsuit challenging the constitutionality of the cap  on federal tax deductions for state and local taxes included in the 2017 tax reform act, passed by the then-GOP controlled Congress. Last week, federal district Judge J. Paul Oetken issued a decision ruling against the plaintiffs and dismissing their lawsuit.

The 2017 tax act capped SALT deductions at $10,000 for single taxpayers or married ones filing a joint tax return, and $5000 for married taxpayers filing separated. The states argued that the cap violated the Tenth Amendment, and also unconstitutionally "coerced" the states. Judge Oetken rejected both claims.Regarding the Tenth Amendment, he had this to say:

The States have cited no constitutional principle that would bar Congress from exercising its otherwise plenary power to impose an income tax without a limitless SALT deduction. In the main, they rely on the notion that the Tenth Amendment preserves states' "power to tax all property, business, and persons, within their respective limits," Thomson v. Union Pac. R.R. Co., 76 U.S. 579, 591 (1869), and so bars "improper [federal] interference with the [s]tates' taxing power"….. Even absent an uncapped SALT deduction, though, states remain free to exercise their tax power however they wish. 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 was equally unpersuaded by the "coercion" theory:

Comparing the situation here to the situation the Supreme Court confronted in National Federation of Independent Business v. Sebelius underscores the frailty of the States' coercion theory. In NFIB, the Supreme Court considered a federal law that threatened to withhold all Medicaid funding from any state that refused to expand its existing Medicaid program in specified ways. See 567 U.S. at 575–76 (plurality opinion). Noting that "Medicaid spending account[ed] for over 20 percent of the average State's total budget, with federal funds covering 50 to 83 percent of those costs," and that "States ha[d] developed intricate statutory and administrative regimes over the course of many decades to implement their objectives under existing Medicaid," id. at 581, the Court held that the law represented an unconstitutional federal effort to coerce the states into adopting the federally desired expansion, id. at 585. But whereas the law at issue in NFIB put a state to the choice of either administering its Medicaid program in the precise way Congress directed or else suffering a "threatened loss of over 10 percent of [its] overall budget," id. at 582, the SALT cap simply requires the States to either exercise their sovereign powers — howsoever they wish — to avert or assuage the cap's effects or else suffer the uncertain budgetary effects of doing nothing. If being put to such an open-ended choice is coercion, it will be the rare piece of federal legislation that comports with the Tenth Amendment.

In the end, Congress enacted the SALT cap pursuant to its broad tax powers under Article I, section 8 and the Sixteenth Amendment. The cap, like any federal tax provision, will affect some taxpayers more than others and, by extension, will affect some states more than others. 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. Because the States have failed to plausibly allege that the cap, more so than any other major federal initiative, meaningfully constrains this decision-making process, this Court has no basis for concluding that the SALT cap is unconstitutionally coercive.

I think Judge Oetken is right on both counts, and indeed I offered similar criticisms of this lawsuit when it was first filed:

The problem with [the states'] argument is simple: nothing in the text or original meaning of the Constitution supports it. To the contrary, the Sixteenth Amendment gives Congress a general power to power "to lay and collect taxes on incomes, from whatever source derived." There is no mandated exemption for income used to pay state or local taxes. There is also no support for the states' position in Supreme Court precedent, or in the American constitutional tradition more generally.

The states point to various statements by framers and ratifiers of the Sixteenth Amendment indicating that the Amendment was not intended to impinge on the rights and powers of state governments. But none of these statements indicate that the federal government was required to create an exemption for state and local tax payments. The absence of such an exemption in no way diminishes states' powers to raise their income taxes as high as they want, although it might, of course, increase political resistance to high state tax rates.

Legal arguments aside, I also noted the somewhat strange phenomenon of liberal Democrats  going to the mat to defend a tax exemption that overwhelmingly benefits affluent taxpayers:

[I]t is unfortunate that some progressives are defending a policy that effectively creates a federal subsidy that mostly benefits the wealthiest residents of the wealthiest states. Only those who itemize their tax deductions (as opposed to taking the standard deduction) can even use the SALT deduction at all, and only about 30% of households (mostly affluent ones) did so in 2013. That figure is likely to decline greatly when the 2017 law takes effect, because—among other things—it doubles the standard deduction. The remaining itemizers will be an even more affluent group than the previous ones. Even under pre-2017 law, some 75% of the benefits of the SALT deduction went to households earning over $100,000 (median household income was about $57,000 in 2016). The states with relatively high state tax rates that get the lion's share of the benefits from SALT are mostly relatively affluent themselves, compared to other states.

Perversely, the SALT deduction undermines both efficiency and equality at the same time. It effectively creates a federal subsidy for high state and local tax rates, thereby skewing state governments' incentives. From an equity point of view, the subsidy overwhelmingly helps the wealthiest residents of some of our wealthiest states, thereby shifting a higher percentage of the federal tax burden to poorer people and regions of the country.

If the Republicans created a special tax deduction that benefits wealthy residents of wealthy areas at the expense of the rest of the country, liberal Democrats would (rightly) line up to condemn it. Yet the SALT deduction the blue states seek to restore to its former level does exactly that. The 2017 GOP tax bill has significant flaws, most notably its long-term fiscal irresponsibility. But the Republicans were right to cut the SALT deduction. Indeed, it might have been even better to eliminate it entirely.

I do understand that the four states fear that, absent a robust SALT deduction, high-income taxpayers might migrate to states with lower tax rates. But there are better, less inefficient and regressive, ways for blue states to increase their tax bases.

When it was first filed, this lawsuit achieved the rare distinction—in our polarized times—of attracting scorn from legal commentators across the political spectrum. At the left-wing Think Progress site, Ian Millhiser called it "one of the stupidest lawsuits of the Trump era." Conservative-leaning tax law scholar Andy Grewal wrote that "[i]f this lawsuit succeeds, I will post a video of myself eating every single page of the Internal Revenue Code, one-by-one." I was highly critical of the suit myself, though I am no great fan of either the liberal left or the conservative right, these days.

I support many of the lawsuits filed by blue jurisdictions against the federal government, in recent years. But this one is an exception.

Judge Oetken is a liberal Obama appointee. But I doubt the result would have been much different with a conservative judge. Indeed, the plaintiff states probably chose to file the Southern District of New York because they thought the judges there would be more favorable to their case than those in other jurisdictions they could have chosen.

The four states plan to appeal the ruling. It seems highly unlikely that their appeal will succeed, however. But, if I turn out to be wrong and the states do somehow manage to prevail, I am happy to renew my offer to use my SALT Tax deduction savings (I'm part of the small minority of fairly affluent taxpayers who stand to benefit from a victory by the plaintiffs) to buy the four state attorneys general behind the suit a free dinner at any restaurant of their choice.

Professor Grewal would be welcome to join us and eat a serving of Internal Revenue Code. I hear it goes well with Tabasco sauce! I suspect, however, that both my money and Prof. Grewal's digestion are safe from harm.

 

 

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  1. The coercion theory cuts against the states anyway. It would prevent the feds from having a salt deduction, or potentially require them to tax state benefits.

    1. In pretty much any other tax case, the narrative is the government, by declining to tax, is subsidizing you rather than merely letting you keep your own money.

      Here that works against them, so situational ethics to the rescue.

  2. I also noted the somewhat strange phenomenon of liberal Democrats going to the mat to defend a tax exemption that overwhelmingly benefits affluent taxpayers

    I’m not sure why you find this strange. The DNC is just as equally represented among the affluent as the RNC, perhaps more so. There are lots of federal deductions that the DNC “go to the mat” for that overwhelmingly benefit affluent people (charitable deductions, for example).

    1. He’s poking fun at them. They claim to be willing to take from all the rich but when push comes to shove it turns out they didn’t really mean it.

      1. I would hope so, but in this mixed up, muddled up, shook up world — nothing can be assumed.

      2. It’s kinda like Obamacare. You think they would have tried to make the Rich pay for it, but they levied taxes against people who were for all extensive purposes middle class.

    2. That’s because liberals are full of crap. None of them are willing to sacrifice their own children’s education for the people they want “integrated.” They’re not willing to sacrifice their own health care for the millions of third worlders they want to import, and they certainly aren’t willing to turn off the A/C because of “climate change.”

      1. None of them are willing to sacrifice their own children’s education for the people they want “integrated.”

        This comment makes absolutely no sense (not a surprise coming from you)

        They’re not willing to sacrifice their own health care for the millions of third worlders they want to import

        Our economy cannot grow and expand without immigrants. Who are a net benefit to our economy. Want to kill an economy? Cut immigration. Also want to kill an economy? Tariffs. These anti-free market policies seemed 100% owned by the Republican Party these days.

        they certainly aren’t willing to turn off the A/C because of “climate change.”

        My solar power system easily covers my A/C usage. And stop with the scare quotes – climate change is very real.

        (I wouldn’t exactly call myself a liberal)

        1. “This comment makes absolutely no sense (not a surprise coming from you)”

          It makes a lot of sense. They aren’t willing to have their lily-white suburban schools integrated.

          “Our economy cannot grow and expand without immigrants. Who are a net benefit to our economy. Want to kill an economy? Cut immigration. Also want to kill an economy? Tariffs. These anti-free market policies seemed 100% owned by the Republican Party these days.”

          Low-skill immigrants are not a net benefit to our economy. Even if they were, at some point the economic growth is outweighed by the congestion.

          “My solar power system easily covers my A/C usage. And stop with the scare quotes – climate change is very real.”

          I don’t believe that, but even if it was, that doesn’t change my point. And yes, climate change is real. Man-made climate change is not.

          1. “They aren’t willing to have their lily-white suburban schools integrated.”

            But many liberals do seek out diverse communities. Conservatives, not so much.

            “Low-skill immigrants are not a net benefit to our economy.”

            Vast numbers of us are the descendants of “low-skill immigrants” who went on to produce highly successful children and grandchildren. I’ve commented before about the impressive number of physician colleagues I have who are the children and grandchildren of barely literate Vietnamese refugees — take the long view.

            1. Says who? Show me some stats on that one.

              Granted, this is anecdotal, but when you look at the areas of concentrated democrat support, it tends to be wealthy suburbs and inner-cities. So, here in the Twin Cities, democrats have huge support in lily-white Edina and South Minneapolis, as well as ares of high non-white non-white populations, such as North Minneapolis, Midway/Frogtown, and East St. Paul. I tend to

              And just this week, the WSJ published a story about how the achievement gap can be tied to schools segregating by income. One of the school districts mentioned was Shelby County, a wealthy suburb of Memphis. It segregated its schools such that the new district had a poverty rate of just 11% (the remainder of the county was triple that). According to its voting records, the county went 61.45% for Hillary in 2016. That in a state that otherwise went 60% for Trump.

            2. re: “many liberals do seek out diverse communities. Conservatives, not so much.”

              Citation, please.

              Liberal strongholds in the US tend to be large cities. While large cities are more diverse in aggregate, the communities and neighborhoods that make up those cities are often highly self-segregated. A rural community, in contrast, is likely to be less diverse in aggregate – but it’s the only community in the area. At the community level, it is often more diverse than the urban neighborhood.

        2. “Want to kill an economy? Cut immigration.”

          A complete faith based statement.

          US immigration was 1/5 as many per year in 1950-59, one of the greatest periods of economic expansion in US history.

          1. While I’m in general agreement with you, I do have to point out that having the rest of the developed world in ruins after WWII *might* have played some small role in how well our economy did in that period.

        3. “My solar power system easily covers my A/C usage. And stop with the scare quotes – climate change is very real.”

          I don’t have solar panels, but isn’t power more or less fungible? If you don’t use AC, can you send the power back to the grid and add a little time to the 12 years?

          1. It’s fungible, but … you still need a buyer for that surplus electricity. If everyone in the area with solar has surplus electricity at the same time — and why wouldn’t they? — then you are likely to have an oversupply, with the accompanying negative price in grid stability issues that the average person never considers.

        4. “That’s because liberals are full of crap. None of them are willing to sacrifice their own children’s education for the people they want “integrated.””

          “This comment makes absolutely no sense (not a surprise coming from you)”

          To be fair it’s a complaint that I often see coming from the far left, directed at the less far left.

          1. Pretty much the only place where I see eye to eye with Phil Ochs

        5. Lol. You’re a dyed blue liberal. Climate change has always been real. Stop pretending the massive deaths from the LIA are the desired baseline for climate.

        6. Also, about schools. Why are liberals so intent on not allowing kids and parents state tuition payments, often less than what they mandate per kid in public schools, to allow the kids to go to private schools of their choosing. The same schools politicians and rich democrats put their kids in.

          The fact you think his comment makes no sense shows you’re simply ignorant.

  3. This lawsuit was dumb and everybody involved in bringing it should feel dumb.

  4. The alternative – go back to pre 2018 law

    Allow the full Salt deduction
    Revert to the old AMT
    Revert to the old higher tax rates.
    Pay higher income tax

    As a CPA, I have had numerous clients lose $40k to $150k in deductions, yet pay substantially less income tax on comparable income in 2018 vs 2017.

    1. I don’t think that was the objection of the states. They want to grab as much money as possible for themselves. If they can increase state taxes but have that offset with federal deductions, then they are free to raise state taxes even more.

      The lawsuit was about greed. Nothing else.

      1. Right. The effect of unlimited SALT was that the federal government subsidized 30-40% of state and local spending. The cap is already working, in that high tax areas are reconsidering plans to raise already high property and income taxes.

      2. This.

        As soon as this passed, all my well-compensated liberal friends were whining about how they could no longer deduct their SALT, so they saw a net increase in taxes. I gently reminded them that, up till that point, they all kept telling me they’d gladly pay more in taxes. I also noted that their real complaint was that low-tax states were no longer subsidizing them.

        1. After which I assume they trotted out the tired (but favorite of the left!) lie that blue states subsidize red states?

          1. Some of that. More that they disliked that others were getting a tax cut. In other words, they don’t mind paying more if they can also stick it to someone who makes even more than them.

      3. “The lawsuit was about greed. Nothing else.”

        Exactly.

    2. “As a CPA, I have had numerous clients lose $40k to $150k in deductions, yet pay substantially less income tax on comparable income in 2018 vs 2017.”

      I lost about $100k in deductions and ended up paying about $30k more in taxes. And this was despite the fact that we were able to increase the home mortgage deduction (a half year of mortgage in 2017 vs a whole year in 2018).

      So, um, I am going to call shenanigans on this one.

  5. Good to see somebody besides the blacks and the poor pay for voting Democrat …

  6. This was always a ‘Hail Mary’ kind of lawsuit. Glad to see it got shot to shit (even if I live in the People’s Republic of NJ).

  7. If they’d ruled the other way, a state could force the federal government to enact a tax deduction just by deciding to tax something!

  8. “…and $5000 for married taxpayers filing separated….”

    I assume you mean to write “filing separateLY,” yes? (Since ‘as separated’ makes logical sense as well, I can’t just assume a simple typo. But, from my own understanding, I do not think “filing as separated” would be a factually-correct statement here.)

  9. The cap, like any federal tax provision, will affect some taxpayers more than others and, by extension, will affect some states more than others.

    Glad to see the principle of inherent equality among the states didn’t last long.

    1. Inherent equality of the states doesn’t mean that you can’t enact federal laws that have disparate impact between states. It means that you can’t enact laws that treat specific states differently than other states.

      If Congress had ended the deductibility of property taxes in a specific list of a dozen states, THAT would have been a violation of inherent equality. Just ending it for all states, and a dozen states were poorly situated for such a change?

      That’s just ordinary law.

      1. Pretty sure the voting rights act applied to all the states. Too bad that only a few states were poorly situated for it.

        1. And that is why those parts were unsustainable

        2. Indeed it did, and the only reason Section 5 got struck down is that Congress refused to update the preclearance list after 40 years AND being warned by the Court that it was dated. Thus demonstrating that the preclearance list wasn’t based on any actual facts, but animus against those states.

          1. the preclearance list wasn’t based on any actual facts

            It was clearly based on actual facts. The whole “equal dignity” business was manufactured by the Court.

            1. No, the reauthorization of the VRA without updating the list of states subject to preclearance was demonstrably irrational.

            2. Look at what the states have done since the preclearance was lifted.

              Seems the Court’s thinking was not borne out by reality.

              1. What have the individual preclearance states done since preclearance was lifted? How does that compare with what the individual non-preclearance states have done since preclearance was lifted?

                And again, most of the voter id laws were passed before Shelby County, and most of the redistricting was completed before Shelby County.

          2. As for “being warned by the Court that it was dated,” that, as I am sure you know, was egregious policy overreach by the Court. Constitutionally, that was for Congress to determine, and it had done so, to the contrary. And it had done so accurately, as it turned out.

            Legislatively, there was stasis. Neither side mustered sufficient power to initiate change. So the Court contrived a standard of (impossible) action, while also inventing new doctrines out of whole, non-constitutional cloth. The novel standard imposed a burden of action on defenders of the Voting Rights Act, and thereby awarded victory to opponents who were obliged to do nothing at all.

            The moment they won, opponents of voting rights indulged themselves in an orgy of electoral abuse across the nation. That fully discredited the decision of the Court—during an interval so short it must be a contender for the all time record for such an occurrence.

            More generally, if you are going to countenance a tag-team partisan policy approach uniting the Republican Senate and the Republican majority on the Court, do not be surprised, and do not whine, after Democrats assemble political power sufficient to put a stop to it. Which they will do by enlarging the Court.

            Afterwards, that majority, schooled by your own side’s baleful example, will take political steps to make it difficult for your own minority side ever again to achieve the kind of ascendance you presently abuse. Being in the majority, in a nation ruled by a majority sovereign, will greatly assist in accomplishing that, and making it last.

            Whether that would also set the stage for political measures to punish conservative constituencies—as movement conservatives have lately been punishing liberal constituencies—is an issue I urge you to focus on. I would be temperamentally opposed to retaliation, considering it unwise long-term policy.

            To keep people like me in that frame of mind, you ought to oppose inflicting deliberate punishments on the nation’s majority. But you cheer it on. In the minority, in a nation ruled by a democratic sovereign, you goad the majority at every turn. Given that, what you are doing is reckless, destructive, and ultimately doomed. You show no sign of noticing.

            Go ahead. Own the libs. Whatever punishments you can inflict, the future will prove long enough to return with interest.

            1. “As for “being warned by the Court that it was dated,” that, as I am sure you know, was egregious policy overreach by the Court.”

              And yet every single liberal member of the Court signed on to the majority opinion questioning the continued relevance of the preclearance requirement. The only concurrance or dissent would have struck down the preclearance requirement right then and there.

              And no, warning the legislature that you used the doctrine of constitutional avoidance to decide a case on statutory grounds but that there are serious concerns regarding the constitutionality of a statute is not a policy overreach.

              “The moment they won, opponents of voting rights indulged themselves in an orgy of electoral abuse across the nation.”

              What orgy? First, Shelby County had no effect in the vast majority of the states because all of the provisions of the VRA that applied to them still applied to them. Second, most of the state voter id laws (in both the preclearance and regular states) were passed prior to the Shelby County decision. Third, the vast majority of redistricting was already complete by the time Shelby County was decided. That’s a pretty disappointing orgy you’ve got right there.

            2. You can’t defend in good faith a preclearance list that covers the Bronx, Brooklyn, and Manhattan, and not Queens and Staten Island. You just can’t.

          3. “and the only reason Section 5 got struck down”

            Shelby County struck down Section 4, not Section 5 (only Thomas voted to strike Section 5). If Congress passes a new list of states subject to preclearance based on rational considerations, the requirements of Section 5 will apply to those states.

    2. The 16th Amendment “trumps” any equality concerns from the earlier amendments.

  10. I’ve thought this lawsuit is so frivolous as to be sanctionable. I doubt that any federal court will be so bold, however.

  11. “Judge Oakden is a liberal Obama appointee.”

    You can say that again.

    His background according to Wikipedia: Yale Law School, clerkship with Justice Blackmun, administration lawyer under Bill Clinton, first openly gay Art. III judge.

    If he’s not sympathetic to these blue states, I can’t really imagine who would be.

  12. “Interesting” that in a “libertarian” blog, no one makes the libertarian argument that payments made for state taxes should be deductible to avoid “double taxation”. The state tax exemption was included in the income tax law from the very start, and, of course, “double taxation” has long been used as an argument against the corporate tax. But it seems like Judge Posner’s libertarian legalism has grown passe.

    1. “‘Interesting” that in a ‘libertarian’ blog, no one makes the libertarian argument that payments made for state taxes should be deductible to avoid ‘double taxation’.”

      Well, that’s because it’s mostly a bad argument. Although there’s a little bit of truth to it when it comes to taxation of certain state benefits, like unemployment insurance.

      1. Fine, TIP, but then all sorts of double taxation arguments – dividends, estate tax – fail.

        1. Huh? If dividends are treated as ordinary income on personal taxes, they are taxed more heavily than other forms of income. Same with estates. Why should we tax money that one gives to one’s kids more heavily than we tax money than one spends?

    2. “double taxation” refers to the the same government entity taxing things twice

      I don’t see many people arguing that a state and the US can’t each tax the same income type.

  13. I thought liberals liked paying taxes and that it is for the good of society to pay more taxes? If we only had a marginal tax rate of 110% then we would all live in utopia. Or at least that is what liberals want us to believe.

  14. Somin’s legal analysis doesn’t look at this from the side of low tax red states suing the government for making SALT deductible, with an equal protection under the law argument. Arguing that allowing higher tax states to deduct SALT from federal taxes is a subsidy to those states at the expense of lower tax states, since higher tax states pay less due to those SALT deductions.

    So why didn’t the Republicans sue to stop this way back when (whenever that was)? IMHO, the RINOs have been running the GOP in Congress for decades, and wanted that.

    1. Let’s turn that around, shall we. Higher SALT payments in blue states pay for needed services that might otherwise become obligations of the federal treasury. Which state do you suppose imposes a higher per-capita federal burden for emergency room reimbursements, Arkansas or Massachusetts?

      1. “Which state do you suppose imposes a higher per-capita federal burden for emergency room reimbursements, Arkansas or Massachusetts?”

        I always hate to guess about that kind of thing, so I went googling. This studyshows MA is in sixth place, while AR is trailing in 34th place.

        It may well be that total per capita medicare expenses are not a good proxy for ER reimbursements (although if so, it’s not clear why only ER money is of interest), or 2014 was an anomalous year, or this study is bogus, etc, etc, etc.

        If you share the source behind your ‘suppose’ we could look into the difference.

      2. The problem I think is that you confuse taxing and spending in your example. It muddles everything and encourages more muddling. It asks the Courts to count beans instead of rule on statutes while cementing together state and federal political spending priorities.

        I find the idea that a citizen of a certain income ought to be taxed on a consistent basis to fund the Federal Government and its priorities compelling. This amount should be irrespective of a State’s own priorities and taxes. If you don’t like that your State Taxes you too much, bring it up with your State Government or move. Don’t use the courts to cover your own state’s spendthrift ways. Vote to lower your taxes.

  15. The dem candidates are calling for taxing the rich. The limit on SALT deductions hit only the rich but dem politicians have been railing against it and trying hard to overturn it. I guess “tax the rich” means some other rich people, not our friends.

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