The Supreme Court declined to review a New York-led constitutional challenge to the $10,000 cap on state and local tax deductions imposed by Congress in the 2017 tax law.
The high court issued an order Monday denying the request from New York, New Jersey, Maryland, and Connecticut to review a decision of the U.S. Court of Appeals for the Second Circuit. The appeals court rejected several state legal arguments against the cap, including that it unconstitutionally coerces the states to abandon their preferred fiscal policies.
The cap generally blocks taxpayers who itemize federal deductions from deducting more than $10,000 per year for paid state and local taxes, including property taxes and either income or sales taxes.
The Monday order leaves the cap in place, and may encourage the states to redouble efforts to obtain legislative relief for those harmed by the cap. The White House’s recent $5.8 trillion budget plan didn’t propose such relief, but several House Democrats have said raising the cap is crucial to securing their votes.
Meanwhile, a $220 billion New York law enacted April 7 included an adjustment to state and local tax law affecting the cap. The move allows more state residents to get the full benefit of a state workaround to the cap that gave partnerships, LLCs, and S corporations an avenue to ease the cap’s impact on individuals’ federal deductions for paid state and local taxes. More than 20 states have enacted such workarounds.
New York, New Jersey, and Connecticut have also sued challenging Treasury Department regulations (T.D. 9864) blocking a form of state SALT cap workarounds, in a case pending at a New York federal court. The efforts involve tax credits offsetting a large portion of donations to state and local charitable funds. The rules blocked federal deductions for the donations.
The case is New York v. Yellen, U.S., No. 21-966, cert denied 4/18/22.
This article was provided by Bloomberg News.