Appeals court rules against blue states in lawsuit over SALT cap

A federal appeals court on Tuesday ruled against four Democratic-leaning states that mounted a legal challenge to the cap on the state and local tax (SALT) deduction created by Republicans’ 2017 tax law.

A three-judge panel of the U.S. Court of Appeals for the 2nd Circuit affirmed a lower court ruling that dismissed the case.

“We conclude that the SALT deduction cap is constitutional,” Judge Raymond Lohier, who was appointed by former President Obama, wrote for the panel.

Republicans limited the SALT deduction to $10,000 in their 2017 tax law in an effort to help pay for tax cuts elsewhere in the measure. GOP lawmakers argue that the cap helps to prevent the federal tax code from subsidizing higher state taxes.

But the cap is strongly disliked by many politicians in high-tax, Democratic-leaning states, who argue that the $10,000 limit hurts their residents as well as their states’ ability to provide robust public services.

New York, New Jersey, Connecticut and Maryland filed a lawsuit against the Treasury Department and IRS in 2018, arguing that the cap is unconstitutional. But a federal district judge granted the federal government’s motion to dismiss in 2019. Tuesday’s appeals court ruling upheld the district court’s opinion.

“In summary, we agree with the District Court that the SALT deduction cap is not coercive in violation of the Tenth Amendment or the principle of equal sovereignty,” Lohier wrote.

Hazel Crampton-Hays, a spokesperson for New York Gov. Kathy Hochul (D), said the governor’s office is “reviewing the court’s decision and evaluating potential next steps to deliver relief to New York taxpayers.”

The appeals court ruling comes as congressional Democrats are considering including some type of change to the SALT deduction cap in a wide-ranging social spending package. Repealing the cap is a top priority for some Democratic lawmakers in states such as New York and New Jersey, but some progressives have expressed concerns that doing so would largely benefit high-income households.

—Updated at 4:23 p.m.