U.S. Treasury Secretary Steven Mnuchin talks to reporters about cryptocurrency in the Brady Press Briefing Room at the White House July 15, 2019 in Washington, DC. Mnuchin said the Treasury is very concerned about Facebook's Libra cryptocurrency and that he wants the government to "make sure that the U.S. financial system is protected from fraud.” Chip Somodevilla | Getty Images

On Monday, a federal judge dismissed a lawsuit filed by four states against the IRS, thwarting four blue states' challenge against a new $10,000 cap on the deduction for state and local taxes, also known as SALT. Those states — New York, New Jersey, Connecticut and Maryland — sued the Treasury Department, Treasury Secretary Steven Mnuchin and the IRS, among others, in July 2018. They alleged that the new limit on the SALT deduction, part of the Tax Cuts and Jobs Act of 2017, was "an unconstitutional assault on states' sovereign choices." In the dismissal, U.S. District Judge J. Paul Oetken in Manhattan said the plaintiff states ultimately failed to show that the SALT cap was unconstitutionally coercive or that it imposed on their own sovereign rights.

"[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. Meanwhile, the states plan to fight back. "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," New York Gov. Andrew Cuomo, a Democrat, said in a statement. "The bottom line is this policy is unprecedented, unlawful, punitive and politically motivated — and it must be stopped," he said. "We disagree with the court's decision and are evaluating all options including appeal." In 2016, New Yorkers writing off state and local taxes took an average SALT deduction of $21,779, according to the Tax Policy Center. Meanwhile, in New Jersey and Connecticut the average deductions were $18,092 and $19,563, respectively.

Two tracks

This development puts the ball back in Congress's court, said Michael D'Addio, principal at Marcum in New Haven, Connecticut. "You know that the federal law is effective and it won't be overturned because this case has been dismissed," he said. "Unless you pressure your senators and representatives, there won't be a solution other than a congressional one." Litigation against the federal government over the SALT deduction is following two tracks, according to Jared Walczak, director of state tax policy with the Center for State Tax Policy at the Tax Foundation. One track — including the case that was just dismissed on Monday — argues that the SALT cap itself is unconstitutional. The other track defends the different workarounds that the blue states have created to allow their residents to write off their state and local income and property taxes beyond the $10,000 limit.

'Workaround' lawsuit

New York Governor Andrew Cuomo. Getty Images