Judge dismisses lawsuit over Trump tax law deduction cap

A federal judge on Monday dismissed a lawsuit from four states over President Trump’s cap on deductions for state and local taxes in his tax reform law.

District Court J. Paul Oetken, an Obama appointee in the Southern District of New York, in his order ruled that the states had failed to show the provision went beyond Congress’s powers and he dismissed an argument from the states that the cap was intended to “coerce” them into changing their own tax rates.

Oetken wrote in his decision that the states “failed to plausibly allege that the cap, more so than any other major federal initiative, meaningfully constrains this decision-making process.” {mosads}

Trump’s 2017 tax law capped the state and local tax (SALT) deduction at $10,000. Four blue states — New York, Connecticut, Maryland and New Jersey — filed a lawsuit challenging the provision.

The states argued that Congress had consistently allowed federal taxpayers who itemized deductions to deduct state and local taxes from their federal income tax returns. The states claimed the Trump cap “eviscerates the SALT deduction, overturning more than 150 years of precedent.” The states also argued that the tax was intended to hurt certain states. But Oetken rejected that argument.

“The cap, like any federal tax provision, will affect some taxpayers more than others and, by extension, will affect some states more than others,” Oetken wrote. “But the cap, again like every other feature of the federal Tax Code, is a part of the landscape of federal law within which states make their decisions as to how they will exercise their own sovereign tax powers.”

The states also argued that the cap was intended to coerce them into changing their own tax rates, lowering them or facing budgetary uncertainty. But the judge also dismissed that argument.

“In essence, the States allege that the SALT cap will burden their taxpayers so heavily that the States will be compelled to adopt ameliorative policies in response. But the States have failed to show that the financial burden their taxpayers will experience as a result of the SALT cap is any more severe than the sort of burden that might accompany any other statewide economic disappointment.

“This Court has no basis for concluding that the SALT cap is unconstitutionally coercive,” he concluded.

The case is a win for Republicans and Trump. The Trump tax law lowered individual rates across the board, while slashing the corporate tax rate. Most people in blue states got a tax cut under the Republican tax overhaul. But critics of the plan say most of the law’s benefits went to individuals in higher income brackets and to businesses.

New York Gov. Andrew Cuomo (D) said in a statement he disagrees with the court’s decision and may appeal. 

Cuomo also called the policy “politically motivated,” saying the SALT cap targeted high-tax blue states. 

“There is no doubt in my mind that President Trump’s unfair tax policy targets New York and other blue states by funding tax cuts for corporations and the rich on the backs of New Yorkers,” Cuomo said in a statement.

“New York is already the largest ‘donor state’ in the nation – paying the federal government $36 billion more than we get back every year. The SALT cap takes this gross imbalance and supercharges it, costing New Yorkers another $15 billion each year,” he added. 

Blue states sought to provide residents with workarounds to the deduction cap, such as by making donations to state and local funds to receive state tax credits. But the Treasury Department and IRS issued regulations blocking such measures.

New York, New Jersey and Connecticut are suing in a separate case, challenging those regulations.