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Federalism

Supreme Court Definitively Ends the SALT Tax Deduction Case

The highly dubious lawsuit filed by four blue states against the the law capping federal tax deductions for state and local taxes is now truly dead in the water.

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As Jonathan Adler points out, today the Supreme Court refused to review a lower-court decision upholding the 2017 tax law's caps on the federal tax deduction for state and local taxes. The law, enacted by a GOP-controlled Congress, limits this $10,000 for individual taxpayers and married couples filing jointly, and $5000 for married people filing separately.  Jonathan rightly notes that the case never had much merit, which is why it was uniformly rejected by the lower-court judges who considered it (all of them Democratic appointees).

I have followed this case from its inception. The claims the plaintiffs raised about coercion, the Tenth Amendment, and other issues, are important for anyone who follows constitutional federalism issues, and would have set a dangerous new precedent had they succeeded. Here is a list of my posts about it. The first is a critique of the lawsuit when initially filed, while the others consider the district court and Second Circuit rulings on the case:

  1. "Four Blue States File Dubious Lawsuit Against Cap on Federal Tax Deduction for State Tax Payments," July 19, 2018.

2. "Federal Court Rules Against Blue-State Lawsuit Challenging Constitutionality of Cap on Federal Tax Deduction for State and Local Tax Payments," Oct. 7, 2019.

3."The (Likely) End of the SALT Tax Deduction Litigation," Oct. 6, 2021.

While the courts reached the correct decision here, I am disappointed we won't get to see University of Iowa tax law scholar Andy Grewal "post a video of [him]self eating every single page of the Internal Revenue Code, one-by-one," as he promised to do, if this lawsuit had succeeded. I myself need not make good on my pledge to use my SALT tax deduction savings to buy the four state attorneys general behind the suit a free dinner at a restaurant of their choice.

I'm part of the small minority of (mostly wealthy) Americans who would have saved money had the lawsuit succeeded. For those keeping score, you can add this to the list of cases where my position on a legal issue conflicts with my self-interest!

Today's airplane mask mandate decision (about which I hope to write more later) is likely another example. See also my earlier analysis of the issues raised by the latter litigation.

UPDATE: I put up a post on the mask mandate ruling here.

NEXT: Confirmation bias meets the Ukraine war and Elon Musk

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  1. Ah, once again the lesson is dealt from a politically biased Court. That lesson being that just because something is legal don't make it right.

    If you did not get this lesson do not worry. It will come from the judicial system many times the rest of this year and going forward.

    1. Well as Bernie Sanders said when SALT tax repeal was the highest dollar item in the Build Back Better legislation:

      “At a time of massive income and wealth inequality, the last thing we should be doing is giving more tax breaks to the very rich. Democrats campaigned and won on an agenda that demands that the very wealthy finally pay their fair share, not one that gives them more tax breaks”

    2. "...the case never had much merit, which is why it was uniformly rejected by the lower-court judges who considered it (all of them Democratic appointees)."

    3. re: "politically biased Court"

      Did you somehow miss that this lawsuit which was filed by D attorneys general and lobbied for exclusively by D leadership was rejected by every judge who considered it? Including the D-appointed trial judge, the D-appointed Appeals court judges and that none of the D-appointed Supreme Court judges dissented from the denial of cert?

      Claims that the Court is politically biased are weak generally. It's a ridiculous claim in this specific case.

  2. Wow, they could have made that a pay per view event and I would have subscribed.

  3. “small minority of mostly wealthy Americans who would have saved money”

    For first time home buyers who pay only interest it was a survival line. Now it’s cut.

    1. Mortgage interest isn't affected by this cap. It only affects taxes.

    2. I think you are confusing your deductions.

      There is still a federal home interest deduction that is good for up to 750,000 in interest. That would buy a home worth 15 million at a 5% interest only rate.

      The Salt tax deduction is for state and local taxes. The state and local jurisdictions are perfectly free to reduce their taxes for first time home buyers that have interest only loans, so it wouldn’t affect those people at all. You should probably be lobbying Albany, Sacramento, and Trenton rather than Washington.

      Or those same people could buy in Florida, Texas, or Arizona and rent an apartment where there job is and save themselves a ton of money.

      1. I don't think it's 750k in interest. It's interest on a 750k or smaller mortgage.

        1. Essentially, yes:

          You can deduct home mortgage interest on the first $750,000 ($375,000 if married filing separately) of indebtedness. However, higher limitations ($1 million ($500,000 if married filing separately)) apply if you are deducting mortgage interest from indebtedness incurred before December 16, 2017.

  4. Look, everyone knows what this was all about. It was Republicans violating their most basic and fundamental principal, that being not to raise taxes, in order to gain a political point against Demcrats and the high tax states they live in.

    But this was useful in showing that even the strongest core belief falls before the goal of gaining political power. Nothing is sacred for these folks, nothing.

    1. Relax. In the long run, these clingers always get what they deserve. I see no reason to expect that to change.

    2. Reality is that most Americans benefitted from reduced taxes with the Trump Tax Cuts, while a small number of very rich people helped pay for those tax cuts. And, yes, that wasn’t fair, increasing taxes centamillionaires and billionaires so the rest of us would have a tax cut. But I sure liked it.

      I was going through our corporate taxes for the last several years, and our tax cut was very significant. Was graphing income, expenses, and taxes, and the tax cut was very visible.

      And, yes, anytime the Democrats talk about tax reform, raising taxes, lowering them, etc, you can be sure that the one thing that they will include will be significantly raising the SALT tax ceiling. It’s not that it would benefit very many of their constituents- it would just benefit the ones subsidizing their campaigns.

      1. Benefited?

        I call absolute bullshit. Know why? They didn't cut spending anywhere near enough. The budget deficit DOUBLED from 500 billion to over a trillion and the debt went from 20 trillion to 22 trillion- a full 10% jump.

        You call that a benefit?

        I guess if you're a complete asshole and are fine with the generations that follow us paying for our profligacy then sure, it was a "benefit."

        The simple fact of the matter is we robbed future generations to let us go out to a restaurant once more a week. It's a tragedy.

        1. Are you really claiming that the Democrats care about the deficit?

    3. The commentary on this has been very confused.
      (a) The rate schedule was reduced significantly at the same time. many taxpayers (including me) lost part of a deduction, but had a net tax reduction due to the reduction in rates.
      (b) The SALT deduction was already limited for many taxpayers (including me) due to AMT. In effect, I was limited to a SALT deduction of 15,000 or so (the amount that brought the regular tax down to the tentative minimum tax).
      (c) Itemized deductions have been limited or reduced for years due to provisions like PEP and Pease. There was obviously no constitutional right to deductions (and such a right would be meaningless without a right to certain tax rates).

      While there may well have been political motivations to stick it to blue states, the howls of protest ring a little hollow. Taxpayers in blue states already had their SALT deduction limited, as the tax-writing committees in those states understood very well. But as long as this was hidden from most taxpayers, the powers that be didn't give two hoots.

      1. What you say is all true, but what the left didn't like was the disparate impact it had. A resident of Texas making $1 million got a bigger tax break than a resident of New York making $1 million.

        1. That resident of New York making $1 million will be moving to Texas before long.

    4. " It was Republicans violating their most basic and fundamental principal, that being not to raise taxes, in order to gain a political point against Demcrats and the high tax states they live in."

      Yup. That staunch Republican AOC even put "tax the rich" on her dress.

    5. Maybe you don’t read the polls. The Republicans are the party of the working class now. And they are starting to act like it.

      1. They're the party of handouts now.

        Future generations be damned- let's let everything fail (infrastructure, raise the debt/deficit, etc.) and let someone else deal with it.

        Republicans are the party of selfishness, and they're acting like it.

        1. LOL, that's rich. Joe Biden: "Vote for Warnock and Ossoff and we'll give you $2,000, right away."

          If that's not the party of handouts, I don't know what is.

          1. they bought Georgia but then again the Republicans sold themselves out in Georgia.

            however like a good Demorcrat Stacey Abrams went from a hundred thousand or more in debt to a millionaire all without working an honest days work. Got to love book deals and political committee jobs.

    6. "the case never had much merit, which is why it was uniformly rejected by the lower-court judges who considered it (all of them Democratic appointees)."

  5. ah, when will everything be done literally right? Who will stand with the real people?

  6. Some apparently have a compulsive need to defend the Democrats, even if they're filing a frivolous lawsuit to cut the tax bill for billionaires.

    If you do not itemize and take the standard deduction, like 90% of taxpayers the SALT has no relevance to you. 75% of SALT deductions (in dollars) are taken by the top 1% of taxpayers, and 25% by the top 0.1%, who shave an average of $135,000 off their tax bill, the equivalent of tip money to them.

    If anything were ever a giveaway to the uber-rich, it's the SALT deduction. And who's championing it? The soak-the-rich, make-billionaires-pay-their-fair-share, purportedly "party of the little guy".

    1. Lots of people say: “soak-the-rich, make-billionaires-pay-their-fair-share“

      But they never mean themselves.

    2. I can see the argument that the $10k cap should be raised some, maybe to $20k or $30k, but eliminating it entirely benefits almost exclusively the rich.

  7. I don't understand why the idea that a limit on SALT deductions is illegal is presented as so ridiculous.

    The conceptual fundamentals seem very straightforward: if states assess a 60% income tax, and the federal government also assesses a 60% income tax, that's 120%. That obviously can't happen. But there's nothing wrong with either tax individually. The only setup that makes any sense is to let one tax apply before the other one. If the states have priority, then they get 60% of your income and the federal government gets 60% of what's left, leaving you with a nonnegative amount of income. If the federal government has priority, then it gets 60% of your income and the states get 60% of what's left. And that's the system we already have, SALT deduction. (Or, for the second alternative, deduction of federal taxes from your state return.) Under the theory that state and federal taxes both apply to gross income... how is a conflict over who gets to take that income supposed to be resolved?

    1. That conflict gets resolved by the state in question driving away anyone who makes that much money.

    2. Your mistake is in thinking that your hypothetical is illegal. It would be monumentally stupid but there is nothing in the Constitution nor in any other layer of law forbidding the state and federal layers from both assessing taxes that add up to more than the total. There is no "priority" between the two. If some jurisdiction actually set up such a hypothetical, the affected people really would owe more than they earned.

    3. Your hypothetical does not exist, because state taxes are deducted in an itemized deduction return before federal income taxes are asessed. So the Feds get to tax income that is leftover after state and local taxes are paid.

      But the SALT limitation denies full deduction and does result in double taxation. But it is not a tax on the very rich, it is a tax on the working middle class who own their homes.

      Of course the real fantasy here is that state and local taxes above $10k apply only to the very rich. If AOC, who is a total ignoramus on taxes (and lot of other things) knew and understood her contstituency she would know that in a huge number of situations working class resident pay far more in just property taxes in her district, and so hit the SALT limit before they even consider state and local income taxes.

      So yes, the SALT limitation is a tax on middle class families, and the only reason that is not known is the ignorance and lies of politicians. Of course, the ignorance and lies of politicians is the reason a lot of stuff is not known. It seems like a lot of commentators to this Forum also do not understand its economics either, although to be fair, some might understand but choose to make a false argument to support their politics.

      1. If the problem is a taxed tax then there is nothing stopping NY and CA and other states from allowing people to deduct federal taxes from their state taxes, or capping property taxes so they don't exceed the 10k deduction.

        Of course, a taxed tax isn't the problem, because everything is taxed multiple times. The problem is that high-tax states can no longer hide the fact that they are high-tax states.

      2. I'm kinda suspicious about working class people in AOC's district being able to even own a home (i do not live in or near NYC and haven't checked the housing market), but NYC property taxes are apparently not that high. "While many other taxes in New York City are quite high (like sales and income taxes), property tax rates in the city are actually pretty low." https://smartasset.com/taxes/new-york-property-tax-calculator

        Same link shows that the average home in Suffolk County (other end of Long Island) pays ~$9500 in property taxes, but has high average home values and property taxes assessed at about 3x the rate as anywhere NYC. I'm doubtful the average working class home owner in NYC is paying anywhere near 10k in property taxes.

  8. On the policy merits, this cap makes sense from a typical conservative view because having the deduction be unlimited incentivizes excessive state government bloat...

    On the legal merits, it's beyond bizarre to say that Congress can't repeal a deduction (fully or partially) that it never had to provide in the first place...

    1. The left makes arguments like that all the time though. For example, they argue that removing certain voting measures, like drop boxes and voting by mail, violates the Voting Rights Act, even if they never had to provide those things in the first place.

    2. That wasn't the claim; the claim was that Congress did have to provide it in the first place.

      It was still frivolous, as I said multiple times in multiple forums.

    3. If its intent and effect is to discriminate against regions based on the political positions of that regions yes it is unconstitutional suppression of political freedom. That judges and politicians do not see this does not change that fact.

  9. The "rich" can structure their income to avoid the tax cap. The "upper middle class" who have W-2 and passive investment income are hit by it.

  10. While I am far from "rich", having real estate in a "blue state", I'm impacted by SALT. i object to the entire concept of the "federal income tax". The Dead Old White Guys must be rolling over when SCOTUS affirms the income tax and all the host of other confiscatory taxes that the central Gooferment levies on the people. “We, The Sheeple” are just stupid cowards. The Revolution was fought over the King's taxes which were a fraction of what we pay today. If the Blue States really had their acts togeter, they'd secede from the Union. If the Red States really had their acts togeter, they'd secede from the Union. There is NO reason to allow Washington to run our lives with one size fits all Gooferment policies. Time has come for everyone to go their separate ways.

    1. You definitely have the right idea. And guess what, wait a little while and what you suggest will happen, it is already in the works.

    2. Irrespective of whether an income tax is a good or bad idea, there was an amendment to the constitution to allow it. SCOTUS can't exactly strike it down without looking like idiots.

  11. I don't have a strong opinion on whether or not money you pay to your state or city to fund them should be deductible on your federal taxes.

    However, it should not matter which *form* of taxes your state or city uses. If you pay $10K per year to your state, it should not matter whether you pay that $10K in the form of income tax, property tax, sales tax, or whatever - its federal tax treatment should be the same.

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