MANHATTAN (CN) – Blue states like New York were some of the first to feel the bite of a cap on tax deductions passed by Republican lawmakers in 2017. On Monday a federal judge killed their lawsuit that contested the move as unconstitutionally coercive.
“The cap, like any federal tax provision, will affect some taxpayers more than others and, by extension, will affect some states more than others,” U.S. District Judge Oetken wrote. “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.”
Taxes are high in New York, but residents historically could offset that burden by deducting all state and local real and personal property taxes from their taxable income, in addition to either all state and local income taxes or all state and local sales taxes.
Not so, however, after President Donald Trump signed the $10,000 cap on SALT deductions, short for state and local taxes, into law on Dec. 22, 2017.
New York filed suit for an injunction, joined by Connecticut, Maryland and New Jersey, but Oetken on Monday dismissed the case.
“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,” he wrote.
At a hearing on the motion to dismiss back in June, Assistant U.S. Attorney Jean-David Barnea tried to distinguish the SALT cap from a more explicit swipe at New Yorkers.
“Yes, Yankees apparel or whatever, that’s fine. That’s sort of a thinly veiled tax on people who live in one state,” Barnea said. “But a $10,000 cap … or a tax law that raises taxes for 4% of people in Kansas, 6% of people in Texas, and 9% of people in Connecticut, like, where is the targeting?”
Attorneys for New York and the other states that sued argued that the $10,000 cap on SALT deductions increases the cost of owning a home, which in turn depresses home values and hurts equity for other investments.
Representatives for the New York Attorney General’s Office said they are reviewing the decision.
Earlier this summer, New York joined Connecticut and New Jersey in a separate lawsuit challenging the IRS final rule that requires taxpayers to reduce their charitable-contribution deductions by the amount of any state or local tax credits they receive or expect to receive in return.