Second Circuit Rejects Blue States' Challenge to Cap on SALT Deduction

A unanimous panel makes quick work of meritless legal claims.


Yesterday a unanimous panel of the U.S. Court of Appeals for the Second Circuit rejected a constitutional challenge to the cap on state and local tax (SALT) deductions on the federal income tax. The court's decision in New York v. Yellen shows that Red States are not the only ones filing weak, politically motivated lawsuits against the federal government.

Congress capped the income tax deduction for state and local taxes as part of the 2017 Tax Cuts and Jobs Act. This limitation primarily effects wealthy taxpayers, which is why some have argued for eliminating it altogether. It also has a disproportionate impact on Blue states because they tend to have higher property taxes and income taxes.

Having lost the effort to keep the SALT deduction in Congress, several Blue States (New York, Connecticut, Maryland and New Jersey) did what states do these days: They filed suit in federal court.

The states' claims did not fare well in district court. Although the court rejected the federal government's effort to dismiss the suit on standing or Anti-Injunction Act claims, it made quick work of the substantive claims.

On appeal to the U.S. Court of Appeals for the Second Circuit, the Blue States obtained about the most favorable draw possible (Judges Sack, Chin and Lohier), but no matter. The states' legal arguments–that a SALT deduction is constitutionally mandated or, in the alternative, that a cap is unconstitutionally coercive–were weak and easily dispatched.

In yesterday's decision, the Second Circuit panel unanimously rejected the blue states arguments.

The Plaintiff States argue that principles of federalism protect each State's "sovereign authority to raise revenue and determine their own fiscal priorities" and bar the federal Government from crowding States "out of traditional revenue sources." Appellants' Br. 31. But they have not demonstrated how the 2017 cap on the deduction unconstitutionally undermines their state sovereign authority over fiscal matters or their ability to raise revenue. The Plaintiff States fail to plausibly allege that their taxpayers' total federal tax burden is now so high that they cannot fund themselves. And while they argue that the SALT deduction lowers "the effective cost of state and local taxes," … they point us to nothing that compels the federal Government to protect taxpayers from the true costs of paying their state and local taxes.

In a clever twist, the Blue States tried to argue the SALT deduciton cap contravened the Supreme Court's decision in Shelby County v. Holder. This argument did not work either.

Finally, the Plaintiff States complain that Congress unfairly targeted them. Given our discussion of the statutory history, it is obviously true that members of Congress were aware that the SALT deduction cap would adversely affect some States more than others. But the SALT deduction cap is not unlike the countless federal laws whose benefits and burdens are unevenly distributed across the country and among the several States. As noted above, "Congress may use its spending power to create incentives for States to act in accordance with federal policies," as long as "pressure [does not] turn[ ] into compulsion." NFIB …. At most, Plaintiff States' allegations reflect that lawmakers were focused on the permissible legislative purpose of influencing tax policy. Nothing in Shelby County suggests that the equal sovereignty principle bars such a purpose.

The plaintiff states may seek to continue this litigation, spending taxpayer dollars on a petition for en banc rehearing or certiorari, but the result will be the same.

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  1. TAX THE RICH!!! Oh, wait….

  2. “they point us to nothing that compels the federal Government to protect taxpayers from the true costs of paying their state and local taxes”

    LOL. That really is the rub, isn’t it? Some state officials want high taxes. They can, but then they have to face their own voters on it, without using Washington as a partial shield.

    IOW, voters in states like NY and NJ get the government they deserve. Don’t like it? Vote in someone else.

    1. Pretty sure they didn’t vote for Trump, whose admin pushed this through.

      That being said, not everything that sucks is a federal case.

      1. As you no doubt know, I am talking about the state representatives and governors. If NY or NJ voters feel their taxes are too high (and as a resident of NJ, I can tell you many do), then vote in someone else.

      2. Reading comprehension: FAIL

        Some STATE officials want high taxes. They can, but then they have to face their own voters on it…

        If Sacramento is concerned that California citizens aren’t getting the full benefit of of their State and Local Tax deduction they can always solve that problem by cutting State and local taxes.

        It’s not like I voted for any of THEM either.

  3. The cap was aimed at, and deliberately meant to hurt, blue states, and will hurt them. This was a factor not present in the many frivolous Republican lawsuits to overturn the 2020 election.

      1. ^ This. So what about how it was “aimed” or what the intention was. It’s not a legal argument. You want to make a legal argument, then make one.

    1. Where “hurt” really means, “stop negating the state’s own harms”.

      It’s the state, after all, that has decided to levy high taxes. All that happens with the SALT cap is that the federal government doesn’t go out of its way to cushion the effects of that decision.

    2. Agreed. The proper response will be to impose severe pain on the clinger states at the appropriate opportunity. It should not be difficult — simply removing disproportionate federal subsidies funded by their betters should cause some of these hayseed states to slip back to the Bronze Age.

      1. Maybe the red states should stop feeding the blue states. Have you ever milked a cow, Rev? Harvested crops? Do you even know the difference between a heifer and a steer?

        1. Kleppe,
          My award for the laugh of the day.
          I could just imagine the dipshit reverend trying to milk a steer.

          1. I think Rev is pretty practiced with the respective hand motions involved though.

        2. The way this works is that I pay others to produce things (beyond my garden).

          Efficient food production relies on automation and scale these days. Thanks for the trip along memory lane, though.

      2. “The proper response will be to impose severe pain on the clinger states at the appropriate opportunity.”

        Sure. Let’s get rid of the Department of Agriculture, Education, Labor, etc.

        But the Dems support a lot of these subsidies.

        But do you have an argument for subsidizing state taxes? Why should it cost state taxpayers less than a dollar to raise a dollar in tax revenue?

        1. My argument is that better Americans should stop subsidizing the downscale states.

          1. Now do it by race!

            Gosh! Rev is a secret racist!

    3. Not even hardly. The cap was intended to, and will, prevent high-taxation states from offloading the consequences of their tax policies onto the rest of us.

    4. I heard this same argument from many of my liberal friends bemoaning the SALT cap – notably the same ones who insist that we should raise tax rates. My response was always that their real objection was that the other, generally less-wealthy states are no longer going to subsidize their taxes. Pulling a subsidy to the wealthy funded by the poor doesn’t make the wealthy the victims they think they are.

      I also think that if you asked the plaintiffs in those 2020 election cases (frivolous as they may be), they would argue that the election policies in blue states were instituted to hurt republicans and republican states by making it harder for other republicans to be elected.

    5. By the way, it’s worth pointing out that the SALT cap doesn’t merely protect red-state residents. It also protects the low-income residents of those same high-tax blue states from exploitation by their wealthier neighbors.

      The SALT deduction makes the tax structure more regressive than it would otherwise be. The SALT cap limits the regressiveness. Eliminating the SALT deduction entirely would be even better.

      1. Correct. Which says something about the current political alignment and who is pushing for more regressive taxation.

    6. “factor not present in the many frivolous Republican lawsuits ”

      Its also not a legally remedial factor so the suit was still frivolous

      Its a political factor and the Democrat majority benefited from the backlash by rich people in new jersey etc.

    7. Capt,
      I’ll note that prior to the 2017, SALT deductions were routinely decried by the far left as a a gift to the rich. There were plenty of calls to end SALT deductions. The Orange Clown actually granted a large part of their wish. They should be happy now, but the D governors in people’s republics of CA, NY and NJ seen the world a bit differently, namely as a punishment of their collective.

      Full disclosure: the SALT cap cost me $40K of deductions, so I am unhappy about it too.

    8. Blue states are not the only places affected. I live in Texas where there is no income tax. High property taxes make up the difference. I own a nice house, so my annual property taxes are 1.5x the threshold.

      So Red Texas is getting hit by this just like NY and NJ. So was the purpose really to stick it to blue states?

    9. “The cap was aimed at, and deliberately meant to hurt, blue states, and will hurt them.”

      How does it hurt them? For taxes above the cap, it will cost taxpayers a dollar to raise a dollar in tax revenue. Why should it cost less?

      1. Because the first rule of politics is that whenever a benefit is enacted, then the beneficiaries believe they are entitled to it by God since he created Adam, and if you take it away, they scream bloody murder.

    10. Many progressives will gleefully tell us that they deliberately want to raise the income tax of the “wealthy” to hurt them, to achieve their concept of fairness. That’s also the entire premise of restoring a lower exemption threshold of the federal inheritance tax.

      Why is it wrong to want to hurt “blue states”, but not the “wealthy”? People say it is the Evangelical Right that wants to impose its morality through law. To my eye, progressives are just as eager to do the same thing, claiming the moral high ground, just applying a different set of beliefs.

    11. Article I
      Section 4
      Clause 1
      The Times, Places and MANNER of holding Elections for Senators and Representatives, shall be prescribed in each State BY THE LEGISLATURE thereof…

      SCOTUS’ failure to enforce this against election-official-created “emergency” absentee ballot rules also had partisan effect. So?

  4. I find it interesting the biggest complaints of unfairness came from blue states overrun with politicians who scream “Pay their fair share!” at every other opportunity.

    You want big-ass, omniprovident federal government? Each person pay their fair share of it.

    You wanf big-ass state government? You pay that, too.

    And before the ignoranti squeak about poor red states, I am not the one pushing out all this cash to buy votes.

    1. It’s not the votes that matter, but who counts them.

    2. “Each person pay their fair share of it.”

      If our backwater states were required to pull their own weight (rather than continue as parasites), they would capsize.

      1. First, with the exception of a few states in the Northeast, California, Colorado, Utah, and Minnesota, every state gets more back than it pays in. A few of the biggest recipients, Virginia, Maryland, and Hawaii are reliably blue.

        Second, this is all a function of wealth. How would you react if someone referred to taxpayers who get more in benefits than they pay in as “parasites”?

        1. If we don’t require the backwater states to pay their legitimate share of the cost of government, what will incline them toward education, marketable skills, reason, economic adequacy, and modernity?

          1. “If we don’t require the backwater states to pay their legitimate share of the cost of government,”

            What’s their legitimate share, Arthur?

            How do you think taxes should be structured?

            I assume you support progressive taxes.

            But it doesn’t matter what tax policy you support. You can have progressive taxes, a flat tax, confiscatory taxes for anybody earning over $200,000 a year, whatever.

            It’s never going to result in proportional tax revenues on a state-by state bases.

            But to respond to that by claiming that some states are paying an unfair amount of taxes and taxing them more is irrational.

            And we know how you love to be rational.

            1. As I recall, that ‘red’ states get disproportionate federal spending is mostly a function of counting federal spending on military bases, which tend to be found in such states.

              1. Also Social Security and Medicare payments. The left never mentions that their favorite programs represent a large fraction of the federal money that goes to “backwater states”.

                1. Those entitlement programs are a big part of the total spending but not that big a factor in the per capita differences by state. Every state has poor and old people. While there are state-to-state differences, it’s not as big a factor as RAK likes to pretend. As Brett points out, the bigger factor in the state-to-state differences is the location of institutional entities and federal land.

        2. Rev’s very premise is faulty. He assumes all federal spending is welfare for poor people, this is far from the truth. The reason Maryland and Virginia are two of the biggest recipients is because of all of the federal employees that live there. The money they are “getting back” is the federal employee’s salaries, and funding for the agencies headquartered in those states.

          Rev’s “backwater” states tend to have more federal land, and larger military bases, and thus get a great deal of federal funding from that.

          I suspect if we limited to just tracking “giveaway” spending like food stamps and section 8 housing vouchers you’d find the largest concentrations of recipients in big cities

          1. Shhhh. Stop using logic to refute the Rev’s bigotry.

          2. There is another “donor state” fallacy. Those states tend to be the headquarters of large enterprises which take a lot of money from other states to pay their workers and taxes, so much of the money they are paying came from somewhere else. Do you really believe that all of the money Apple makes comes from inside California?

            1. I’ve made that point before myself: Do you suppose the vast majority of economic activity is reported in cities because it actually happens there? Or is it just because it’s reported where the offices are?

              Does ADM report its profits in farm fields?

        3. “with the exception of a few states in the Northeast, California, Colorado, Utah, and Minnesota, every state gets more back than it pays in.”

          Well, yeah. In the aggregate the feds spend a lot more than they tak in, so pretty much everybody gets more back.

      2. ^^^^^^^^^^^^^^^^^^^^^^^^
        Waste of brain cells warning
        Kookland is performing his weird trick of “footnoting” his assertions with a music video. I didn’t follow it, but hovering over it shows “youtube”. So there’s no need to click on it.

    3. It’s to be expected. All that talk is always just a sales pitch for greed. They want money other people earned. They want it in unlimited amounts. They have no shame or compassion, and if it ever looks like they do, it’s merely a performance for an audience.

  5. You know, it is remarkably silly whenever someone, especially a law professor, says “meritless legal claims.”

    First, one side of the argument (unless this is harassment lawfare) doesn’t believe they are meritless.

    Secondly, how many times have people been hit on the head with “meritless legal claims” that some court, you know, thought had merit? This whole blog is constantly filled with posts about them.

    1. Your embedded assumption that favorable treatment in court means that a claim had merit in anyone’s eyes is unwarranted. Bad faith and corrupt judgment is IMHO common, and you certainly can’t prove otherwise.

  6. If “blue” state politicians want the deduction back, they can follow the traditional method of asking Congress for tax cuts for the rich.

    1. That’s one way to address this. Another would be to stop subsidizing the can’t-keep-up states.

    2. They have. Repeal of the cap is supposedly in the Democrat’s $3.5 Trillion omnibus non-infrastructure infrastructure bill.

      1. “Repeal of the cap is supposedly in the Democrat’s $3.5 Trillion omnibus non-infrastructure infrastructure bill.”

        “Supposedly”. LOL.

        Does nobody in the media care that we’re fighting over whether or not to spend this money and NOBODY KNOWS WHAT THE HELL IS IN THE BILL?

        This thing is a perfect example of how ridiculous our politicians and the media have become.

      2. Repealing the SALT cap would be a big lowering of tax as a %tage of their AGI for the upper 5%.
        The imposition of the SALT cap was accompanied in the 2017 tax bill by the elimination of the AMT which had not be inflation adjusted for many years.
        For the upper 5% that combination meant that their tax % of AGI did not change very much.

  7. Am I missing something — I thought that there is no hypothetical standing? If a court decides that plaintiffs lack standing, then it cannot reach the merits, because absent a case or controversy, the issue is not within the judicial power of the United States. Or was it that a preliminary injunction was sought, and the courts went to the likelihood of success of plaintiffs on both the standing and merits issues?

    1. The standing rules for states suing as the state are different than for individuals.

  8. If you can afford to live in an expensive high tax state where income if also likely higher that seems an equitable allocation of resources, in effect means testing SALT.

  9. Pedant alert: “This limitation primarily effects wealthy taxpayers…”
    Should be “affects”.

    1. My 8th grade English teacher is smiling down at you from the next world.

  10. Interesting decision on federalism and federal coercion of states. The aspect that was not considered in this decision was that the rules in Congress required revenue neutrality. What this meant in the 2017 Act was that capping the SALT deduction allowed Congress to correspondingly reduce overall individual and corporate tax rates (and the proposed repeal would be “paid for” by increasing those same taxes). Congress could have, of course, just cut those taxes, without capping the SALT deduction, but this shows that Congress was not operating in a vacuum, but rather was engaging in trade offs, determining that broader based tax cuts were more beneficial than narrower tax increases such as the capping of the SALT deduction.

    1. And how or why should that have been “considered in this decision”?

  11. I’m from a high-tax Blue State and I’m in favor of the SALT cap and would even be open to eliminating it as well as other deductions such as mortgage interest. I don’t care about “soaking the rich” or rather rich Progressives, I want to minimize the distortions that the federal tax code creates in the economy by subsidizing some forms of economic activity and penalizing others. If people want to vote for higher taxes and (presumably) more public services in their states, they should be able to do so but they should pay the full cost of the taxes that they voted for and not have them subsidized by the federal tax code (which also makes it harder for people to “vote with their feet” without leaving the entire country). To the maximum extent that the responsibility for what levels of taxes are levied and services are provided are made and paid for at the most local level, the better.

    1. TW,
      Unfortunately most sections of the tax code are “subsidizing some forms of economic activity and penalizing others.”

  12. The politics of this are stupid. The SALT deduction is a bad economic policy because it causes distortions in favor of wealthier citizens. The same argument can be made over the mortgage interest deduction, which was also limited I believe, but far more Americans are affected by the mortgage than pay unusually high state taxes.

    As someone who has lived in high tax states for almost all my life it is rather annoying to have a cap and I fully expect my representative to fight against it … but yeah I’ll admit it is bad economic policy.

    1. AC,
      Don’t hate the cap so much. As your income rises you’ll be much better with the cap and no AMT than you’d have been with full SALT but with AMT

  13. Hmm. On the one hand, the SALT cap is good public policy. On the other, it hurts me in the wallet.

    1. As I have already written. You should not think about the cap without considering the other big change in 2017. Elimination of AMT

  14. If Democrats think capping the SALT deduction is unfair, they can repeal the cap — they don’t have to go to court about it; they control the White House, the House, and the Senate. Ah, some folks upthread think the cap repeal may be buried in the “stimulus” or maybe the “infrastructure” bill — which I guess means that the Dems don’t want the voters to know that they support repealing the cap. Wonder why the “people’s party” would feel that way?

    1. If they repeal the cap, I will gladly accept the large tax cut.

    2. “Democrats” is not a collective noun. “Democrats” did not go to court over it. Specific Democratic officials in some specific states did.

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