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Judge tosses suit by CT, other ‘blue states,’ that challenged SALT cap

Washington – A federal court on Monday dismissed a lawsuit by Connecticut and three other high-income states seeking to overturn a new cap on the deductibility of state and local income taxes on federal returns.

The so-called state and local income tax, or SALT, cap was limited to $10,000 during a massive federal tax overhaul in 2017. The limit is an amount Connecticut, New York, New Jersey and Maryland said hurt wealthy states with high property taxes.

U.S. District Judge Paul Oetken in the U.S. District Court of the Southern District of New York, said those states failed to show that the cap on the popular tax break exceeded Congress’ broad taxing power or was unconstitutional.

Connecticut Attorney General William Tong hinted at an appeal of the decision.

“The SALT cap is an abusive and discriminatory tax hike on Connecticut,” Tong said. “This disappointing decision makes it harder for our state to protect its taxpayers from the disproportionately harmful effects of Trump’s tax law. We are in close coordination with other impacted states to consider next steps.”

The ruling is a victory for the White House and Republican supporters of the 2017 tax overhaul. The SALT cap helped pay for parts of that $1.5 trillion overhaul, which included cutting taxes for wealthy Americans and slashing the corporate tax rate.

The SALT cap went into effect for the 2018 tax year. The Trump administration has estimated it would leave filers unable to deduct $323.1 billion in state and local taxes from their 2018 returns.

Connecticut and the other states argued that the SALT cap effectively raised property taxes by eliminating the full federal deduction of property taxes, thereby discouraging home sales and decreasing revenues to states collected by taxing such sales.

The states also argued that the new federal tax law discriminated against states with high property prices and high property taxes, mostly Democratic-leaning “blue states.”

The states also said the tax law was an unconstitutional power grab that affected state’s rights.

Oetken rejected those arguments.

“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,” he said. “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. “

Oetken also wrote “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.”

The House Ways and Means Committee is weighing several bills that would undo or eliminate the SALT cap. A leading bill  would repeal the cap while also raising the top marginal tax rate on individuals from 37 percent to 39.6 percent, where it was before the 2017 tax law.

While the Democratic-led U.S. House may pass legislation that would  fully restore the deductibility of state and local taxes, that legislation is likely to languish in the GOP-led Senate, especially after Oetken’s decision.

9 comments

Bryan Meek September 30, 2019 at 6:34 pm

Anyone could see this coming from a mile away. So what did Hartford do in response? They raised taxes on everyone and just about everything. Well everyone who eats, anyway.

There has been a SALT restriction on the books since the early 70s called the Alternative Minimum Tax. This new limitation definitely hurts anyone with a 6 figure job, a hefty mortgage on an expensive home that is taxed to death by the local city or town, and also empty nesters. About 5% of the population nationwide and 10% here in CT.

The absolute irony of all of it, is those who were caught in this have been targeted as being rich for years by Tong and his cohorts…but now they are against it because it came from Trump of course. Deflect, deflect, deflect from the real issue which is outrageous spending levels here in CT that require massive property and income taxes.

Sue Haynie September 30, 2019 at 8:48 pm

Connecticut/Democratic leadership don’t actually give a darn about those taxpayers negatively affected by SALT, they’re just mad because the Feds made it harder for the State and Towns to raise taxes on them!

The US District Court Judge, “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. “

steve October 1, 2019 at 1:07 pm

Bryan, the proposed tax did not hit everyone who eats, but everyone who eats out (I think they also rescinded that) but if they didn’t the sales tax on groceries–ingredients, from milk to lobster and steak stays the same–0. More importantly though was the dearth of discussion on the SALT (100+ year old law) by a conservative Republican committee- and two, the claim that the tax change would result in a total addition to the deficit of 1.5 Trillion over 10 years—This year alone the deficit will be approx $1 Trillion and that’s in a good economy….pathetic… The exclusion of SALT was entirely to hurt people living in states that vote Democratic- not to help the country, can’t expect much more from a party that has no problem with their leader extorting other countries to help rig an election. Clearly, in the minds of many Republicans, a Democrat elected to the White House is an existential threat similar to how an Israeli might feel about Iran having a nuclear weapon. Yup take no prisoners-

Bryan Meek October 1, 2019 at 6:00 pm

Not sure what our excessive spending has to do with national or geopolitical events, but if our lawmakers had simply raised the sales tax on the existing basket of goods from 6.35 to 6.5%, they would have generated as much revenue as the grocery tax forecasted. Instead of doing this, they decided to impose massive compliance and systems cost work on every single retail business in the state. Just another nail in the economic coffin. Sad, we have people cheerleading it.

Again, I didn’t support the SALT cap and I think it needs tweaking, but the fact AMT went unchallenged for 50 years told you right away that this lawsuit was a publicity grabbing stunt and not a real measure for a workable solution. Right now, it seems Congress best idea about going to fix this is to investigate hearsay.

Ed October 2, 2019 at 11:40 am

The federal government created the SALT deduction along with the federal income tax back in 1913. A mistake that’s more than 100 years old. The deduction has had the effect of allowing several states to raise their respective taxes. A resident of one these states would complain but put up with the taxes because they always knew they’d get their federal taxes lowered. Now that’s no longer the case. I’m optimistic that this will force many states if not all to control spending.

Bryan Meek October 2, 2019 at 12:04 pm

Ed, I don’t disagree and AMT from the 70s is a monster to record and track. The one thing they should tweak though, is it should be raised or lowered for married couples since it also hits income tax. The cap is currently $10k for all filing types. Married couples should get double, or singles should get half of that since it limits income tax, not just property taxes.

They should also reinstate the 2% floor on Financial Advisor fees, which can be draconian for those living off of portfolio income. We haven’t yet seen an impact from this as significant as SALT limitations, but this potentially could change investment behavior for the worse and that’s bad for everyone.

The other thing that can be fixed and be a huge win is to raise the ceiling on income for student loan interest deduction and get rid of the $2500 ceiling on that. It’s ridiculous that Obamacare took over the student loan industry and made college financing more expensive than ever. The fed funds rate at near zero and some kids are paying 8 and 9 % interest. The least we could do is allow them to write all of it off.

Joe October 3, 2019 at 2:43 pm

How can any citizen of the United States think it’s fair to force some states to pay more federal taxes than other states.

Our countrymen in Louisiana, Texas, Alabama and Florida (to name a few) have been acutely aware of this inequity for a long time and President Trump finally straightens this out.

Next, President Trump is going to make doctors post their fees and services up front to level the playing field for patients.

And Trump has changed the FDA rules so old people can buy excellent hearing aids next year OTC for $3,000 LESS!

And Trump is going after crooked pols who get bribes and inside jobs for their kids. Perot ran on this. Remember?

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