Next year will provide further clarity in the effort to undo the $10,000 cap on federal deductions for state and local taxes, when the legal battle moves to the U.S. Court of Appeals for the Second Circuit.
Last week four states filed an appeal of a federal district court decision upholding the constitutionality of the measure.
The one sentence notice of appeal signed by the attorneys general of Connecticut, Maryland, New Jersey and New York didn’t offer any legal arguments.
The states are appealing a 37-page ruling by U.S. District Court Judge J. Paul Oetken in Manhattan that dismissed the claims by the four states by citing a U.S. Supreme Court decision involving a longstanding federal tax exemption for interest earned on state-issued bearer bonds.
The Sept. 30 ruling cited the high court’s ruling in South Carolina v. Baker that “rejected the claim that Congress had overstepped its constitutional authority" when it eliminated the tax exemption.
The stakes are higher in this new case, however.
"This cap has already put a heavy burden on the hard-working, middle-class families of New York, and, in the years ahead, it is expected to cost New York's tax payers over $100 billion, which is why we will fight this senseless and unconstitutional law," New York State Attorney General Letitia James said last week in a press statement. "New York will not be bullied into paying more in taxes or changing its vital public investments because of Congress and the president's partisan choices."
The $10,000 limit on the SALT deduction caused an estimated 10.88 million individual taxpayers to lose $323.1 billion in tax deductions for the 2018 tax year, the Treasury Inspector General for Tax Administration reported in February.
The impact has been the greatest in high income, high tax states where many residents pay substantial property taxes and income taxes.
State and local governments are concerned that the $10,000 SALT cap will limit their ability to enact future tax increases to pay for public services, including infrastructure projects financed by bonds.
According to New York officials, an analysis by the state Department of Taxation and Finance estimates state residents will pay up to $15 billion annually in federal taxes because of the SALT cap.
Connecticut Attorney General Willam Tong said his state estimates residents will pay $2.8 billion more annually in federal taxes because of the cap. "We are aggressively pursuing this appeal and will continue to fight to protect our taxpayers from Trump’s discriminatory and abusive money grab,” Tong said.
New Jersey Attorney General Gurbir Grewal said, “The federal government acted unlawfully when it imposed arbitrary and unprecedented limits on the tax deduction for state and local taxes, and it harmed residents all across our state when it did so."
Members of Congress who oppose the limit have not settled on a strategy for lifting or eliminate it, but will feel pressure to act as the 2020 election approaches. Some freshman Democrats won their seats by criticizing Republicans who supported the $10,000 ceiling on what’s known as SALT.
Rep. Bill Pascrell, D-N.J., told Roll Call newspaper last month a bill to repeal SALT for three years and offset the revenue loss by restoring the top marginal tax rate to 39.6% will likely be released this month.
The 2017 Tax Cuts and Jobs Act that limited the SALT deduction to $10,000 also lowered the top marginal tax rate to 37%.
Even if a three year suspension could pass the House, it’s highly unlikely to be considered by Senate Republicans who hold majority control of that chamber.
Rep. Don Beyer, D-Va., told Roll Call, “We may sadly have to admit that in this particular Congress it’s a message bill.”
One Senate Republican, however, has filed a bill that would double the current SALT ceiling through 2025. Sen. Susan Collins, R-Maine, introduced S. 2762, the SALT Deduction Fairness Act, on Oct. 31.
A similar House bill, H.R. 1757, introduced by Rep. Lauren Underwood, D-Ill., would increase the deduction to $15,000. It has 20 cosponsors.
Another House bill, H.R. 2894, authored by Rep. Daniel Liponski, D-Ill., also would increase the deduction to $15,000 and increasing the corporate tax rate to a rate determined as necessary to fully offset the revenue loss. The current corporate tax rate is 21%.
Senate Majority Leader Mitch McConnell, R-Ky., controls which bills reach the Senate floor for a vote and the vast majority of bills that have passed the Democratic controlled House have no chance of being considered in the Senate.
