Evaluating the SALT Deduction Constitutional Challenge
July 17, 2018
Four states (New York, Connecticut, Maryland, and New Jersey) have brought a lawsuit against the federal tax bill, the Tax Cuts and Jobs Act (TCJA), claiming that its $10,000 cap on the state-local deduction is unconstitutional. They make three claims of unconstitutionality: that the SALT cap violates the Tenth Amendment (states’ rights), that it violates the Sixteenth Amendment (federal power to tax incomes), and that it violates Article I, Section 8 (Congress’s power to tax). We predicted the 10th Amendment and Article I, Section 8 claims back in April. We also predicted an equal protection argument, which they ended up not making.
First is the Tenth Amendment claim. After stating the generic truth that states retain sovereign functions after the Constitution’s adoption, they try to turn that into an argument that the Tenth Amendment forbids any federal action intruding upon state sovereignty:
“By reserving to the states a concurrent power to tax, and thereby imposing structural limits on the federal government’s tax power, the Founders ensured that the federal government could not use its new tax power to undermine the sovereign authority of the States to determine how to make public investments and how to tax their residents to support those investments.”
This is not true. In the 1941 Darby case, the Court unanimously held that the Tenth Amendment cannot be used as an independent ground for striking down a federal law. If a law is struck on other grounds, the Tenth Amendment then leaves it to the states. Now, there are a lot of scholars who think this is a stilted reading of the Tenth Amendment. Madison, for instance. But reading the Tenth Amendment as prohibiting the federal government from interfering in state or local matters would strike down a lot of federal laws. (The complaint cites neither Madison nor Darby Lumber, nor Garcia, nor Steward Machine, nor any other case on point. The precedents are really tough on this argument.)
Second is the Sixteenth Amendment claim. The claim is that several politicians told New York in 1913 that the Sixteenth Amendment wouldn’t ever affect state finances:
“The assurances provided by Senators Borah, Root, Bailey, and others were important in persuading New York and other States to ratify the Sixteenth Amendment. Based on these assurances, the States understood that the new authority they were conferring on the federal government would not empower the federal government to encroach on the States’ sovereign tax power, including their ability to impose their own state tax regimes free from federal interference.”
If New York really believed that, that was foolish. They got sold the Brooklyn Bridge. It was obvious a federal income tax would affect state finances. Even if someone told them it wouldn’t, it’s not enforceable—what matters is what was passed, not what was allegedly promised.
It’s also not “unprecedented” for Congress to limit the SALT deduction:
- In 1964, the deduction was changed from applying to all state taxes to instead only certain ones
- In 1969, the Alternative Minimum Tax (AMT) was implemented, which limited the deduction for high-income people
- In 1986, the deduction was limited to apply only to income and property taxes
- In 1993, the Pease limitation was put into place
- Multiple times the standard deduction was changed
Woe to the person who claims Congress can’t change tax law because someone promised it would never change. Congress can. Just because something has been around for a long time doesn’t make it constitutionally required. Tax deductions and carveouts are a matter of legislative grace.
Third is the “commandeering claim” that Congress is exceeding its tax power by instead forcing the states to do things that Congress couldn’t do otherwise:
“While the Supreme Court has long recognized Congress’s power to incentivize States to adopt federal policy priorities through its Spending Power…the 2017 Tax Act is not an exercise of such power, and the coercion here is unprecedented and unlawful. While Congress’s tax power is broad, it cannot be used to accomplish unconstitutional ends…As relevant here, it cannot be used to purposefully treat a handful of States unfavorably with the goal of coercing those States into choosing between significant financial harm and abandoning their sovereign authority to determine their own taxation and fiscal policies in favor of federal policy priorities.”
This is the strongest argument, but it still falls short. They cite U.S. v. Butler (1936), which is a warning sign, because that was the last case where the Supreme Court struck down a federal law before the big constitutional change in 1937. It’s not often cited, at least not as the only citation.
They could have cited New York v. United States (1992), which states the rule for when Congress goes too far on making a state do something. But the rule is a pretty strong one, as we have written previously:
“The Court ruled that Congress can provide financial or other incentives or pursue joint programs, but cannot engage in ‘outright coercion’ by ‘commandeering the legislative processes of the states by directly compelling them to enact and enforce a federal regulatory program.’”
It was on this ground that part of the federal Medicaid expansion from the Affordable Care Act was ruled unconstitutional in 2012. But the new federal tax law doesn’t rise to that level. New York isn’t compelled to do anything and still has total control over its state tax laws. Indeed, New York has passed a SALT workaround in part based on this claim.
By the way, the SALT workarounds will likely be struck down by the IRS as illegal. You can read our pieces on them here.
The standard has to be more than “impact state and local revenues” or “interfering with the States’ ability to raise tax revenue.” Otherwise Medicaid, unemployment insurance, and every federal grant program would be unconstitutional.
There is also a claim that New York will suffer because it can’t raise taxes as high now that the federal tax code no longer subsidizes it. The complaint references various comments from key Republicans about that being a result of the tax bill:
“The financial harms that the Plaintiff States and their residents will suffer because of the new cap on the SALT deduction are not merely an incidental effect of the 2017 Tax Act. When Congress enacted the cap, President Trump, Secretary Mnuchin, and numerous Republican legislators made clear their intention was to injure the Plaintiff States and thereby coerce them into changing their tax policies and cutting the vital public investments that tax revenues support, including, for example, safety, schools, infrastructure, and transportation.”
Of course, this ignores that Republicans had plenty of other reasons to pass the bill other than punishing New York. As we’ve written before, “Other legitimate rationales that the federal government could cite for enacting the law could include increasing take-home income for taxpayers, increasing economic growth or economic competitiveness, and distributional progressivity.”
And again, New York still controls its tax and spending system. Stopping further subsidies does not amount to “compelling them to enact and enforce a federal regulatory program.” Even if Republicans “targeted” New York, that is really an equal protection claim, which the lawsuit does not make. We evaluated why such an argument wouldn’t succeed, back in April.
As long as the federal tax law isn’t commandeering states and as long as it’s geographically uniform (the same law applies to the full United States), it’s constitutionally valid under current precedents.
It’s also worth noting that the complaint doesn’t cite a lot of cases. The cases it does cite are old, or don’t stand directly for the propositions claimed. Contrary cases are also not cited, which will irritate whatever judge gets it. These aren’t good signs for the lawsuit’s success. It’s not frivolous, but I’d call it meritless. The SALT cap disproportionately impacts high-tax people in high-tax states, but that is not a constitutional violation.
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