President Donald Trump signs the Tax Cut and Reform Bill in the Oval Office at the White House in Washington, on Dec. 22, 2017. (Brendan Smialowski/AFP/Getty Images)

Federal Judge Tosses Lawsuit Against Trump Administration’s State and Local Tax Cap

A federal judge in Manhattan has dismissed a lawsuit seeking to overturn the Trump administration’s state and local tax deduction cap.

U.S. District Judge J. Paul Oetken ruled that the federal government was within its rights to impose an income tax that did not give people the ability to deduct state and local taxes (SALT) with no upper limit.

“The states have cited no constitutional principle that would bar Congress from exercising” its authority “to impose an income tax without a limitless SALT deduction,” the judge wrote in his Sept. 30 opinion (pdf).

The $10,000 limit on deductions for state and local taxes was part of a broader tax overhaul package passed in 2017 by Congress and signed into law by President Donald Trump. Earlier, there was no limit on how much in state and local taxes could be deducted against federal tax payments.

The cap was one of the most contentious provisions in the tax reform bill, known as the Tax Cuts and Jobs Act of 2017 (pdf). Hardest hit by the cap were high-tax, Democratic-led parts of the country, with residents of such states as Maryland and New Jersey paying more in federal taxes.

Four states responded with a lawsuit against the federal government.

Lawsuit

The plaintiffs—attorneys general for New York, New Jersey, Maryland, and Connecticut—argued the cap was unconstitutional because it pressured those states to change their tax policies, allegedly undercutting their “sovereign authority to determine their own taxation and fiscal policies.”

Maryland Attorney General Brian Frosh, who was one of the four to file the lawsuit last year, was cited by The Baltimore Sun as saying the cap “disrupts the longstanding balance of taxing power between the states and the federal government.”

New Jersey Gov. Phil Murphy, a Democrat, denounced the tax overhaul as a “weaponization of the tax code,” claiming that it was “created to punish states like New Jersey.” The ability to reduce the amount of federal tax by writing off state property taxes, which in New Jersey are the highest in the nation, was a popular option with the state’s residents.

Governor of New Jersey Phil Murphy speaks in Oceanport, New Jersey on June 14, 2018. (Dave Kotinsky/Getty Images for William Hill Race & Sports Bar)

State Republicans argued New Jersey’s high property taxes should, as a matter of priority, be considered for reduction.

“If Phil Murphy really cared about the infamous property tax burden that all New Jersey families carry, he would have addressed it in any of his budgets or through legislation in Trenton,” state GOP Chairman Doug Steinhardt said in a statement, via NJ.com. “He has raised taxes and increased spending at every turn.”

The Trump administration argued the lawsuit should be dismissed on grounds that the states lacked jurisdiction and that they failed to indicate a valid legal claim.

Judge Oetken found that the states did have the standing to sue but that the states failed to cite constitutional principles that would prevent Congress from imposing the cap. He also dismissed the plaintiffs’ argument that the cap was designed to force “certain disfavored, high-taxing states” to lower their taxes.

Oetken wrote that the cap “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.”

‘Evaluating All Options’

In response to the ruling, New York Gov. Andrew Cuomo said in a statement that his state is “evaluating all options including appeal.”

“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. “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.”

New York Gov. Andrew Cuomo in a file photograph. (Scott Heins/Getty Images)

In his opinion, Oetken acknowledged that the cap would affect some states more than others but said it doesn’t prevent states from making their own decisions about taxes, so he had “no basis for concluding that the SALT cap is unconstitutionally coercive.”

“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] SALT cap simply requires the states to either exercise sovereign powers—howsoever they wish—to avert or assuage the cap’s effects or else suffer the uncertain budgetary effects of doing nothing,” Oetken wrote in his opinion.

The ruling is widely seen as a victory for the Trump administration, which used the cap to fund parts of the $1.5 trillion tax overhaul.