Updated 2.30 p.m. with comments from Attorney General William Tong.
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.
Looks like lower income states won’t have to subsidize high roller mcmansions in the northeast and on the left coast. Bad fiscal management/high taxes in these states also don’t get subsidized by lower cost of living state taxpayers either. Aren’t these some of the same folks who are always complaining about fairness and helping the little guy?
Since we already federally subsidize those states (see source data below), now we’re just subsidizing them even more — along with corporations, real estate developers, and high-wealth individuals who made out like bandits with the GOP Donors Tax Cut of 2017. As someone who took on a mortgage on my first home — our retirement home — after saving for 17 years and just before the GOP Donors Tax Cut of 2017, and as a married-filing-separately taxpayer, I am limited to a $5,000 SALT deduction. My actual SALT last year was $9,098. And FYI, I’m far from a high roller and the home is a modest house built almost 90 years ago. So spare me the drivel about fairness and helping the little guy.
https://www.businessinsider.com/federal-taxes-federal-services-difference-by-state-2019-1
The difference per capita, i.e., how much the average state resident received in federal services vs. what they paid in federal taxes:
California: -$348
Connecticut: -$1,242
Massachusetts: -$1,532
New Jersey: -$2,748
New York: -$1,216
Exactly. The reason our property and state taxes are higher is because we lose the federal money that we send in. The list posted above shows how much flows from the “high rollers” to the meg nutters. I’m not sure how people in Mississippi, Arkansas, Kentucky and Tennessee can possibly think that they subsidize NY and CT, but apparently they do.
I am honestly shocked, however, that Alabama has a net negative amount. Surprising.
Really? So your property and state tax bill has everything to do with lack of Federal dollars coming into Connecticut? So municipalities cant balance their budgets because of lack of Federal dollars? Interesting. So the perennial 2 Billion dollar state budget shortfall can be blamed on lack of Federal dollars? Thanks for straightening me out.
Not everything, no. Because not everything is one extreme or another. I was simply pointing out that your statement of lower income states subsidizing higher income states is false, and provided just one (of many) reasons why state taxes are higher here.
Now that we’ve heard your tale of woe about SALT, we didn’t hear about the rest of your tax return, with lower marginal rates and higher standard deductions.
I am looking forward to the Democrat Donors Tax and Spend Increase act when they take the White House, all of course to increase fairness and help the little guy.
I love how everyone will chime in, and squeal, ” THIS ISNT FAIR!” If you’re upper middle class / upper class in CT – then join the burn, and join disproportionate tax PERCENTAGE the middle and lower class feel here too!
THIS IS THE DIRECT FAULT OF OUR ELECTED OFFICIALS AND THEIR METHODOLOGY OF TAX AND SPEND. DONT LIKE IT? DO NO VOTE BLUE. BLUE COMES AT THE COST OF TAXATION AND MONEY.
Meg Nutter – not sure if you’re being facetious, but the Northeast and CA are the ones that subsidize other states – fact. Maybe the SALT deduction benefited those states more than others, but when all revenue and spending is considered, they are clearly net payors not receivers of federal $. Not even close.
That may be true, but its disconnected from the tax law. Do you think we should have a “blue state SALT exemption” because our state sends more money to Washington than it receives? Should we make decisions about how to fund Federal spending at military bases or to people receiving Federal entitlements based on where they are located/live?
We live and work in a high cost of living/high income state. Our property taxes are some of the highest in the nation, and our bankrupt state perenially raises our tax burden to perpetuate the unholy Democrat/state union alliance. That is our chosen reality.
Perhaps, just perhaps, these states have wrought this because of their propensity to over-tax their residents.
I never expected this to fly and as painful as it will be to my wallet, I hope the decision sticks.
Tong again wasted the money of Connecticut citizen taxpayers continuing to tilt at windmills. Dom Quixote rides again!
Democrats complain those with higher income don’t pay enough taxes. Limiting the SALT deduction forces higher income people to pay more taxes. How much is enough, Democrats?
A near doubling of the personal exemption (which almost never gets mentioned in these articles) helps lower income residents offset the limitations.
The so-called Deep Blue States complaining the loudest are also states which welcome and protect large Illegal Alien populations; an extremely large cost. Nationally, these ‘residents’ cost us a net $110B+ each and every year, which many believe is a ‘conservative’ estimate due to severe undercounting of those here illegally. Granted, they are not the only reason for overtaxing, just a large chunk.
Deep Blue States–like CT–need some careful and deep introspection.
First and foremost, the SALT Cap is only painful because “Property Taxes in the State of Connecticut Some of the Highest in the Nation”. Please don’t blame the Federal Government or IRS for a State Government that is robbing you blind. The Federal Government role is not to refund the money your state government wastes and squanders. Hey, you made the decision to live in Connecticut, “Pay the Piper!”