Federal Judge Dismisses States’ Challenge to Tax Reform Law

Taxpayers in states such as California and New York hoping for some relief from the state and local tax (SALT) deduction cap contained in the 2017 Tax Cuts and Jobs Act were dealt a blow on Monday by a federal judge in New York.  Four states, New York, New Jersey, Connecticut, and Maryland, who are heavily impacted by the SALT deduction cap, had sued the Department of Treasury (see State of New York v. Mnuchin), alleging that the Act unconstitutionally impaired their ability to set their own preferred tax policies and therefore “verges into territory constitutionally reserved to the states.”  The States further alleged that the cap would result in decreased property values and thus decreased transfer tax revenue.  New York alone estimated that the cap would result in a $63.1 billion loss of home equity.

Judge J. Paul Oetken for the Southern District of New York ruled that while the States did have standing to sue the US Government, the SALT deduction cap brought about by the Act falls within Congress’ broad power to tax under Article I, Section 8 of the Constitution.  Judge Oetken was appointed by President Obama in 2011.  It remains to be seen whether the States will appeal their case to the 2nd Circuit, where President Trump has appointed 3 judges and has 2 additional nominees pending before the Senate.

What this ruling means practically is that the SALT deduction cap of $10,000 per year is here to stay.  This cap disproportionately affects states such as California and New York who have high property values and high state and local taxes.  There are other workarounds being proposed by states eager to mitigate the effects of the cap, but those have so far been shot down by the IRS issuing new regulations banning these workarounds.  For the time being, the cap remains.

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