2d Circuit Rejects States' Challenge To $10,000 Cap On State & Local Tax Deduction

New York v. Yellen, No. 19-3962 (2d Cir. Oct. 5, 2021):

New York, Connecticut, Maryland, and New Jersey (the “Plaintiff States”) appeal from a judgment of the United States District Court for the Southern District of New York (Oetken, J.) granting the defendants’ motion to dismiss for  failure to state a claim and denying the States’ cross-motion for summary  judgment. The States allege that the $10,000 cap on the federal income tax  deduction for money paid in state and local taxes, enacted as part of the 2017 Tax  Cuts and Jobs Act, violates the United States Constitution. They argue that the state and local tax deduction is constitutionally mandated, or alternatively that the cap violates the Tenth Amendment because it coerces them to abandon their preferred fiscal policies. The District Court held that the States had standing and that their claims were not barred by the Anti-Injunction Act (“AIA”), 26 U.S.C. 10 § 7421(a), but it concluded that the claims lacked merit. We agree with the District Court, and we therefore AFFIRM the judgment. ...

[T]he Plaintiff States argue that the SALT deduction is required by the text of Article I, Section 8 and the Sixteenth Amendment of the Constitution. The SALT deduction cap, they say, effectively eliminates a constitutionally mandated deduction for taxpayers. The Plaintiff States also argue that the SALT deduction coerces them to abandon their preferred fiscal policies, in violation of the Tenth Amendment. After “paus[ing] to consider the implications” of the arguments on both sides, as well as the history of the deduction and the precedent that binds us, we conclude that the SALT deduction cap is constitutional. Nat’l Fed’n of Indep. Bus. v. Sebelius (“NFIB”), 567 U.S. 2 519, 550 (2012) (opinion of Roberts, C.J.) (quotation marks omitted).

What really propels the plaintiffs’ view that Congress is constitutionally foreclosed from eliminating or curtailing the SALT deduction is their position that, until 2017, Congress had never done so. We disagree that the Constitution imposes such a constraint on Congress.

The Plaintiff States alternatively assert that the SALT deduction cap coerces them to abandon their preferred fiscal policies in favor of lower taxes and reduced spending, in violation of the Tenth Amendment. We agree with the District Court that the plaintiffs fail to state a Tenth Amendment claim. We are not persuaded that the cap unconstitutionally infringes on state sovereignty.

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• Reuters, U.S. Appeals Court Rejects Challenge By 4 States to State and Local Tax Cap