Supreme Court Rejects Blue State Challenge of SALT Deduction Caps

The Supreme Court on Monday declined to grant an appeal filed by a group of blue states seeking relief from a federal law capping the amount of state and local taxes individuals may deduct from their federal taxable income.

New York, Connecticut, New Jersey, and Maryland filed a federal lawsuit that aimed to strike down the 2017 limitations put in place by Congress. The state and local taxes (SALT) cap was set at that time at $10,000. Taxpayers are allowed to deduct the amount of state and local taxes they pay up to the cap limit in a given tax year from their taxable income for federal tax purposes. The plaintiff states argued in court that the latest SALT cap improperly infringes on state taxing power.

In their brief to the Supreme Court, the states argued that the power Congress has to impose taxes is “cabined by the structural requirements of federalism.” They argued that the Constitution thereby prevents the federal government from retraining each state’s power to impose taxes to “sustain their operations.”

The states also alleged that the “long history of federal income taxation” shows that the states and Congress understood that a SALT deduction for “all or nearly all” state and local taxes was required under the Constitution to protect state sovereignty and taxing authority.

The current SALT cap was enacted during the Trump administration and has been defended by the Biden administration during the current litigation that ended this week at the Supreme Court.

Under Democratic control, the House passed a bill last year that would raise the SALT cap to $80,000 until 2031. After then the cap would revert to $10,000 unless amended. The Senate has not yet acted upon the bill. However, Sen. Bernie Sanders (I-VT) is leading a movement to implement a separate plan to make the SALT deduction unlimited for persons earning less than around $400,000 annually and phasing it down above that amount.

Republicans oppose both bills, arguing that increasing the SALT cap would only work to benefit the super-wealthy residents of high-tax blue states like the ones who filed the lawsuit challenging the caps.

The current SALT cap dating back to 2017 will expire after 2025.

The Supreme Court did not provide any opinions or other explanation for its order declining to hear the appeal from the four Democrat-led states.