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Posted by Ann Brown on Fri, Oct 4, 2019 @ 02:33 PM

shutterstock_159118949A New York U.S. District Court recently dismissed a case that challenged federal limits on state and local tax deductions. Certain high tax states have long taken issue with the tax reform change that placed a $10,000 “cap” on individual taxpayer deductions for state property taxes and state and local income taxes. The opinion issued in late September deals another hit to the effort to overturn the provision. In June, the IRS put an end to state attempts to bypass the cap through workarounds such as state tax credits. It appears that for the time being, the state and local tax (SALT) cap is here to stay.

The Basics of the SALT Cap Case

Connecticut, Maryland, and New Jersey joined the state of New York in raising a legal question over whether the tax reform’s SALT cap tax unfairly targeted certain high tax states, as residents in those states would be the most affected.

In a suit dating back to July 2018, the states argued that Congress overstepped its bounds by making a change that would affect state taxes. The states also alleged that the SALT cap would be detrimental to the state because it will reduce the states’ real estate transfer tax revenues. With the cap, owning a home becomes more expensive because owners cannot deduct as much in property taxes, the states argued. When the cost of owning a home becomes more expensive, it decreases the value of real estate. Home owners may delay selling their house, for example, because of the limits on the deduction.

The federal government moved to dismiss the case on the grounds the states did not have a legal claim to fight the cap. It called the tax impact estimates too speculative.

What the Summary Judgment Tells Us About the SALT Cap

Although Judge J. Paul Oetken ultimately sided with the federal government’s request to dismiss the case, his opinion held a few points of interest:

  1. The States Had a Legal Claim to Make the Case Judge Oetken agreed with the state argument that an economic impact may be felt by the states as a result of the cap on state and local tax deductions. He also weighed in on the fact that there is a specific jurisdiction question at the root of the case—whether the federal government can impose a SALT cap.
  1. The Federal Government’s Powers to Tax Permit It to Limit SALT Deductions In his opinion, Judge Oetken writes that the states did not offer up a constitutional principle that would prevent Congress from enacting the SALT cap. The constitution gives the federal government the power to lay and collect income taxes and to grant exemptions from that tax. Judge Oetken dismissed the idea that states’ sovereign authority to tax was disrupted by the ruling, noting that states can choose to adapt their policies to work around federal tax policies and limitations (such as by lowering state tax rates).
  1. State Claims of Injury Might Be Overblown Judge Oetken noted that the claims about individual taxpayer impact used flawed inputs. The states compare what taxpayers would have paid in taxes had the tax reform law passed without the SALT cap versus how it passed with the SALT cap. But as has long been noted, the tax reform law included certain provisions to counteract the tax cuts it offered and help “pay for” the tax breaks it gave to businesses and individuals. Judge Oetken argues that the tax reform law’s provisions might have looked very different had the SALT cap never been on the table, so the comparison is not a sound one.

Next Steps

It is unclear whether the states will appeal the opinion. New York governor Andrew Cuomo said afterwards in a statement that New York was considering an appeal. The Attorney General for Connecticut called the decision “disappointing” and said it was in talks with the other states in the suit to evaluate what happens next.

For the time being, residents in high tax states should consult with their tax advisor about how to optimize their strategy with the assumption that the SALT cap will remain in place until the provision (along with the other individual tax changes in the tax reform law) expires at the end of 2025.

To learn more about the impact of the SALT opinion, please  contact us.

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Ann-Brown - web

Ann Brown is a Senior Tax Manager in the New England State and Local Tax Practice. She can be reached at ann.brown@cbiz.com or 617.761.0658.

 

 

 

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Tags: State tax, Sales Tax, sales and use tax, state and local tax (SALT), new england state and local tax, SALT cap tax, Ann Brown

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