As part of the Tax Cuts and Jobs Act (the Act), the limitation imposed on the state and local tax (SALT) deduction as part of the Tax Cuts and Jobs Act (TCJA) has wreaked havoc in many states. In fact, four states â€“ Connecticut, New Jersey, New York and Maryland â€“ have determined that the limitation is unconstitutional. On July 17, they filed a lawsuit in federal court that seeks to make the law unenforceable.
In their lawsuit, the states argue that the Act â€œevisceratesâ€ the SALT deduction, which allows taxpayers who itemize deductions on their federal income tax returns to deduct state and local real estate and personal property taxes, as well as either income taxes or general sales taxes.
According to the lawsuit, which names as defendants U.S. Treasury Secretary Steven Mnuchin and IRS acting Commissioner David Kautter, as well as the U.S. Treasury, the IRS and the United States of America (including all government agencies and departments responsible for the Actâ€™s passage and implementation), the SALT cap â€œinterferes with the statesâ€™ sovereign authorityâ€ to make their own tax and spending choices.
Specifically, the four states, or plaintiffs, argue the SALT limitation, or â€œcapâ€ instituted under the Act will inflate millions of taxpayersâ€™ federal tax liability. That, in turn, will constrain the states in their ability to maintain their respective fiscal and taxation policies without interference from federal authorities. This, they argue, is a direct violation of the Sixteenth Amendment. The plaintiffs take their argument even further by alleging that the SALT cap “violates bedrock principles of federalism enshrined in the Tenth Amendment.”
As a result, the plaintiffs seek â€œdeclaratory and injunctive reliefâ€ in the lawsuit that would essentially eliminate the cap by rendering it unenforceable. The lawsuit makes no request for monetary compensation or damages.
Under the Act, taxpayers may claim an amount for all state and local sales, income and property taxes collectively that doesnâ€™t exceed $10,000 (or $5,000 for married taxpayers filing separately). Prior to the Actâ€™s passage, there was no specific limitation on the amount of taxes one could claim on Schedule A. The Act instituted a cap on SALT deductions effective for the 2018 tax year.
The SALT deduction dates to the dawn of the Civil War in 1861 when Congress enacted the federal income tax and as part of that, included a deduction for all (or a significant portion of) state and local taxes. Since then, Congress has revised the deduction multiple times, and those revisions have varied widely in their scope and reach. It could be argued that the Actâ€™s cap on the deduction is simply another revision. One might also argue that the Constitution does not explicitly prohibit such revisions.
According to statements, the plaintiff states feel strongly otherwise. In a press release announcing the lawsuit, New York Attorney General Barbara Underwood said, â€œNew York will not be bullied. This cap is unconstitutionalâ€”going well beyond settled limits on federal power to impose an income tax, while deliberately targeting New York and similar states in an attempt to coerce us into changing our fiscal policies and the vital programs they support. We will not allow partisans in Washington to hurt our people or interfere with our policies. Weâ€™ve filed suit against this unconstitutional attack on New York and our stateâ€™s fundamental rightsâ€”because we wonâ€™t stand by and let Washington pick the pockets of New Yorkers.â€
So, what will the capâ€™s ultimate fate be? The court will decide thatâ€”and itâ€™s likely a decision wonâ€™t be rendered quickly. In the meantime, the IRS has promised guidance in short order on the SALT deduction, as well as various state workarounds. It also is likely to enforce the SALT deduction cap.
Questions? Please contact James Ortiz in our Tax Department.