Supreme Court Won’t Hear Case on Limit to State and Local Tax Deductions

The U.S. Supreme Court on Monday rejected a bid by New York and three other states to overturn a $10,000 cap on federal tax deductions for state and local taxes that Congress imposed as part of the Trump administration’s sweeping tax overhaul in 2017.

The court’s decision not to consider the matter, one of dozens of cases the justices said they would not hear, left intact a lower court’s ruling. It had rejected the states’ argument that, as Democratic bastions, they had been targeted by Republican lawmakers and that the deduction cap was an unconstitutional infringement on their sovereignty.

In affirming that ruling in October, the U.S. Court of Appeals for the Second Circuit found that it was within Congress’s broad authority over tax policy to impose the so-called SALT cap. It limits to $10,000 the amount of state and local taxes people may deduct on their federal income tax return. The appeals court ruled that the SALT cap was like other laws that have different effects from place to place.

“It is obviously true that members of Congress were aware that the SALT deduction cap would adversely affect some states more than others,” the Second Circuit wrote. “But the SALT deduction cap is not unlike the countless federal laws whose benefits and burdens are unevenly distributed across the country.”

The cap on deductions was among the more contentious provisions in the 2017 tax legislation, which slashed the country’s corporate tax rate and offered an overall income tax cut for individuals. Critics and some tax policy experts said the tax law mainly helped rich Americans.

The deduction limit — which hits high-tax, often Democratic-led states disproportionately — was one way for Republicans to try to help offset the roughly $1.5 trillion cost of the tax cuts over 10 years. The Joint Committee on Taxation, Congress’s nonpartisan scorekeeper on tax matters, estimated that the cap and related provisions would raise close to $700 billion in revenue over that period.

New York officials estimated that the cap would cause the state’s taxpayers to pay $121 billion in added federal taxes from 2018 through 2025, after which the cap, like many of the 2017 law’s provisions, is set to expire.

Gov. Kathy Hochul of New York expressed disappointment in the Supreme Court’s decision not to hear the case, which the state — joined by Connecticut, Maryland and New Jersey — brought in 2018.

In a statement, Ms. Hochul called the SALT cap “an economic attack” on “middle-class families” by Donald J. Trump, then the president, and a Republican Congress. She called on President Biden, whose administration opposed the states’ appeal, and congressional Democrats “to undo the damage caused by the Republican tax plan and restore the full SALT deduction.”

But eliminating the deduction limit has become a matter of dispute among Democrats, to the point that the disagreement may have contributed to the failure to approve Mr. Biden’s ambitious Build Back Better social-policy spending package.

Many of the more progressive Democrats in Congress have balked at scrapping the cap, which they argue benefits wealthy taxpayers at the expense of the working-class families whom the party should be focused on.

Moderate Democrats in Congress, many of them representing suburban areas that swing between parties, insist that eliminating the cap would provide much-needed relief to their financially overburdened constituents.

One such Democrat, Representative Thomas Suozzi, who represents parts of Long Island and Queens and who is challenging Ms. Hochul in the gubernatorial primary, echoed the governor’s response to the court’s decision not to hear the case.

“Now it is more essential than ever that we lift the SALT cap and reduce taxes in New York,” he said via text on Monday. “With the highest state and local taxes in America, we have an affordability problem in New York State.”

Nicholas Fandos contributed reporting.

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