MANHATTAN (CN) — The Second Circuit appeared unwilling Thursday to intervene in the challenge of a Trump-instituted cap on how much state and local taxes taxpayers can deduct from their total taxable income.
In high-tax states like New York and New Jersey, 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. President Donald Trump revoked those privileges, however, just before Christmas 2017 when he signed the Republican tax law that put a $10,000 cap on so-called SALT deductions, short for state and local taxes, while broadly cutting taxes on corporations. That year, all 10 states with the highest taxes were represented in the Senate by Democrats — with the exception of Vermont’s Bernie Sanders, who is technically an Independent.
New York, which has the highest annual combined taxes per capita, lead a team of other Democratic states in seeking an injunction against the cap, but U.S. District Judge Oetken dismissed the case last year for failure to state a claim.
Pushing for a reversal, Caroline Olsen, an assistant solicitor general representing the state challengers, told an appeals panel Thursday that Trump’s $10,000 ceiling on SALT deductions upends 150 years of consistent congressional practice.
“Congress has maintained the deduction through periods of war, severe fiscal deficit, and changing political parties, and it has done so based on the understanding that the deduction is necessary to protect the states’ sovereign authority to determine how to raise revenue and how to invest in their own residents and infrastructure,” Olsen argued Thursday during a 37-minute remote conference this morning.
U.S. Circuit Judge Robert D. Sack quickly interjected. “Over the years, Congress fiddled with the deduction, and isn’t this another fiddling with the deduction,” the Clinton-appointed judge asked.
“This is the first direct cap on the deduction,” Olson replied, “and that has constitutional significance because of the inherent link between the deduction the price of state and local taxes. It is undisputed that capping the deduction increases the cost of state of local and taxes, and that’s true in a way that past tinkering and incidental limitations on the deductions just haven’t been. They have not gone to the effective or marginal value of the deduction in the same way.”
While the three-judge panel reserved a decision on the appeal Thursday, U.S. Circuit Judge Raymond Lohier indicated they may rely on Supreme Court precedent.
“When it comes to taxes, the Supreme Court tells us, unless there is something explicit in the Constitution that stops Congress and the executive from passing a plenary law in the tax area, we’re going to step out of the way,” the Obama appointee noted Thursday.
The states’ argument “seems to resist what we’ve been told by the Supreme Court about the plenary power of Congress in connection with its power to lay and collect taxes under the Constitution,” Lohier said.
“It has told us that that power knows no restriction except where one is expressed in or arises from the Constitution,” he added. “And that you’ve got South Carolina v. Baker, in which the court rejected the claim that Congress had overstepped its constitutional authority when it a very longstanding federal tax exemption for interest earned.”
U.S. Circuit Judges Lohier and Sack were joined on the panel by U.S. Circuit Judge Denny Chin, an Obama appointee.
The government argued on appeal that Judge Oetken was correct to dismiss, arguing that the SALT deduction cap does not improperly target the plaintiff states for special treatment or infringe on their equal sovereignty.
“Indeed, nothing in the Constitution, including unwritten principles of federalism, requires there to be any SALT deduction, let alone an unlimited one,” the government’s brief states.
New York Governor Andrew Cuomo has denounced the Trump administration for leading the charge in a series of political and economic attacks on deeply Democratic cities. “Trump is actively trying to kill New York City. It is personal. I think it's psychological,” Cuomo said in September. “He passed SALT, which was targeted just at New York City tax reform; it cost us $14 billion.”
In July, Senate Minority Leader Charles Schumer, a New York Democrat, pushed for the cap on the state and local tax deduction to be eliminated in an upcoming coronavirus relief package, urging Senate Majority Leader Mitch McConnell to "join the House, and join the Democrats in the Senate, and get rid of that cap."
Schumer pledged that Senate Democrats would make it a priority to permanently terminate the deduction cap if they win the majority in 2021. "I want to tell you this: If I become majority leader, one of the first things I will do is we will eliminate it forever," he said. "It will be dead, gone and buried."
Control of that chamber will be determined by a runoff election for Georgia’s two Senate seats held Jan. 5, 2021.
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