Four States Challenge the Cap on SALT Deductions Erik M. Jensen* The attorneys general of New York, Connecticut, New Jersey, and Maryland have fi led a complaint in New York v. Mnuchin, chal- lenging the constitutionality of the $10,000 cap on the deduction for state and local taxes established the Tax Cut and Jobs Act of 2017. This article considers the most important of the states’ claims and concludes that none of them is convincing. Introduction In a recent article in the Journal, I set out my preliminary thoughts as to why the cap on the deductibility of state and local taxes (SALT), included in what is generally called the Tax Cuts and Jobs Act of 2017 (the Tax Cuts Act),1 should survive constitutional challenge.2 (The cap: Starting this year—and, at least for now, scheduled to expire after 2025—individual taxpayers will be able to deduct no more than $10,000 per year of the otherwise potentially deductible taxes paid to state and local governments (generally income and property taxes).3) I noted that the leaders of three blue (Democratic) states— New York, Connecticut, and New Jersey—intended to challenge the cap on constitutional grounds because of the unhappy consequences the cap will have on many taxpayers in their states. The complaint in that suit, New York v. Mnuchin (with Maryland added to the list of plaintiffs), was fi led by the four state attorneys general, all Democrats, in July.4 The complaint makes a * Erik M. Jensen is the Coleman P. Burke Professor Emeritus of Law at Case Western Reserve University School of Law, and is Editor-in-Chief of the Journal. He may be contacted by email at [email protected]. 1 P.L. 115-97 (adding IRC § 164(b )(6)). 2 Erik M. Jensen, “Is Capping the Deduction for State and Local Taxes Unconstitu- tional?,” 35(3) J. Tax’n Invs. 27 (Spring 2018). 3 IRC § 164(b)(6). The cap doesn’t apply to SALT deductions attributable to carrying on a trade or business or to an activity described in IRC § 212. IRC § 164(b)(6). 4 See Complaint, New York v. Mnuchin, No. 18-cv-6427 (S.D. N.Y. fi led July 17, 2018) [hereinafter Complaint]. The complaint is available at https://ag.ny.gov/sites/default/fi les/salt_ complaint_as_fi led_with_exhibits.pdf. Maryland’s governor, Larry Hogan, is a Republican, but the state’s attorney general is a Democrat. 51 52 JOURNAL OF TAXATION OF INVESTMENTS few points that I didn’t address in the earlier article, and it tweaks a few other arguments that I had assumed the states would make.5 Another look at what we now know to be the states’ positions is therefore in order. The suit has a partisan fl avor because one of the claims is that the Republican president and Congress intended to punish taxpayers in blue states, which are likely to have much higher taxes than do red ones, and a cap on SALT deductions will affect more persons (in absolute and relative terms) in the four plaintiff states than in, say, red-state Wyoming. And the four state governments are targeted, too, or so it is claimed, because the cap makes it more politically diffi cult for the plaintiff states to raise taxes—or even to maintain taxes at current levels—and therefore to provide governmental ser- vices that the states consider critical. The complaint doesn’t change my preliminary conclusion that this suit is a waste of time, money, and effort, and that seems to be the general opinion in other commentary, particularly (but not limited to) that in politi- cally conservative publications.6 Indeed, New York v. Mnuchin has been characterized by opponents as a political, rather than a legal, exercise— a form of virtue-signaling, one might say—and the use of state funds to prosecute such a suit has therefore been questioned.7 In addition, it’s been noted that, if the cap on deductibility were to be struck down, the benefi - ciaries wouldn’t be the downtrodden.8 State and local taxes are generally itemized deductions,9 and a SALT deduction provides no benefi t at all to a non-itemizer. Because of the Tax Cuts Act’s signifi cant increase in the 5 The complaint doesn’t raise all the possible arguments I hypothesized in the earlier article. For example, there is no claim that the cap violates the Equal Protection Clause (a claim that would have been a loser anyway). 6 See Brian Riedl, “Democrats in Four States File a Misguided Lawsuit Against the Tax-Reform Law” (Nat’l Rev. Online, July 24, 2018) (quoting University of Iowa Professor Andy Grewal, not at all a right-wing ideologue: “If this lawsuit succeeds, I will post a video of myself eating every single page of the Internal Revenue Code, one-by-one.”), available at https://www.nationalreview.com/2018/07/democrat-state-lawsuits-over-tax-deductions-mis- guided/; Maria Koklanaris, “States’ Suit Against SALT Cap Faces Signifi cant Obstacles,” 2018 Law360 199-183 (July 17, 2018) (quoting University of Connecticut Professor Richard Pomp, who characterized the suit as “[g]randstanding and a waste of money”), available at https:// www.law360.com/articles/1064096/states-suit-against-salt-cap-faces-signifi cant-obstacles. 7 See, e.g., “Albany’s Millionaire Tax Revolt” (Wall St. J., July 19, 2018, at A16) (“[P]rogressive states are dumping taxpayer cash into lawsuits that are essentially campaign documents. These states apparently have money to burn.”), available at https://www.wsj.com/ articles/albanys-millionaire-tax-revolt-1531955466?mod=searchresults&page=1&pos=1. 8 Id. (“[S]avor the irony that New York Governor Andrew Cuomo and others are stand- ing up for millionaires.”). See also Riedl, supra note 6 (“[F]our states are now suing the federal government in hopes of mandating a $650 billion tax cut, of which 57 percent would go to the richest 1 percent of families. The lawsuit, a pure publicity stunt, is so frivolous and unseri- ous it may as well have been written in crayon.”) 9 But see supra note 3 (noting that the cap doesn’t apply to business- or investment- related SALT deductions). FOUR STATES CHALLENGE THE CAP ON SALT DEDUCTIONS 53 standard deduction,10 the number of itemizers will go down dramatically in 2018.11 So it’s only relatively high-income people—not, one would think, the base of the Democratic party—who would benefi t from eliminating the cap.12 (For that matter, not all relatively well-to-do people would benefi t. For anyone subject to the alternative minimum tax, the cap is irrelevant. State and local taxes aren’t deductible in computing alternative minimum taxable income.13) The complaint focuses on the purportedly bad motivation behind the cap—the animus—and an arguable violation of the Tenth Amendment, which reserves to the states powers that the Constitution did not give to the national government: “The Powers not delegated to the United States by the Constitu- tion, nor prohibited by it to the States, are reserved to the States respectively, or to the people.” The cap is claimed to interfere with constitutionally pro- tected state prerogatives. This article considers four points: (1) the broader understanding of animus refl ected in the complaint compared to preliminary reports of what the plaintiff states might argue; (2) the claim that the cap violates the Tenth Amendment because of its effects on state governmental functions; (3) the argument that it was understood from the beginning of the income tax that a SALT deduction was constitutionally required; and (4) the argument that, even if a SALT deduction may not have been constitutionally required as a matter of fi rst principle, once Congress creates and maintains such a deduc- tion, it may not signifi cantly cut back on that deduction. Animus In my earlier article, I discussed and ridiculed the animus argument as it had been advanced by New York Governor Andrew Cuomo, who was quoted as saying that, if one email could be found refl ecting a member of Congress’s intention to punish blue states with the cap, the states would prevail in the suit.14 10 See IRC § 63(c)(7)(A) (generally increasing the basic standard deduction for taxable years 2018 through 2025 to $12,000 per person, with that fi gure to be adjusted for infl ation). 11 See infra notes 56–59 and accompanying text. 12 The taxpayers in the four plaintiff states who are hurt by the cap obviously include some high-income Republicans as well—a few, at least—among the heavily Democratic elec- torates. Any attempt to precisely calculate how the benefi ts would be distributed throughout a state’s population is going to be criticized, but there’s no doubt that the benefi ciaries would largely be well-to-do persons. 13 IRC § 64(b)(1)(A)(ii). See also infra notes 62–63 and accompanying text. 14 See Jensen, supra note 2, at 29–30. Cuomo claimed that a single email noting that “[t]hese are Democratic states and therefore we can get it passed” would show “targeting for political rea- sons,” and the challengers would be “off to the races.” Quoted in Kate King, “New York-Area Gov- ernors Plan to Sue Over Federal Tax Law” (Wall St. J., Jan. 26, 2018), available at https://www.wsj. com/articles/new-york-area-governors-plan-to-sue-over-federal-tax-law-1516991910?mod=se archresults&page=1&pos=3. 54 JOURNAL OF TAXATION OF INVESTMENTS Not surprisingly, the complaint adopts a more nuanced posture, looking at pub- lic statements by Republican offi cials, not emails: During the debates on the 2017 Tax Act, executive offi cials and Repub- lican legislators—the legislation received no Democratic votes in either house of Congress—issued press statement after press statement making clear their intention to injure the Plaintiff States.