Four Northeastern Democratic states urge the Supreme Court to hear a case challenging the state and local tax deduction (SALT) limit created by tax law during the Donald Trump administration in 2017.
New York, New Jersey, Connecticut and Maryland filed their petition in superior court after a federal appeals court ruled against them in October.
“I am proud that we are taking this matter to the Supreme Court to continue fighting on behalf of New York taxpayers,” Gov. Kathy Hochul said in a press release Monday.
Republicans created a $ 10,000 cap on the SALT deduction as part of their 2017 tax bill, but that guideline has been unpopular with high-tax, Democratic-leaning states, whose governors argue it has led to drastic tax increases for residents. .
New York, New Jersey, Connecticut and Maryland initially filed their lawsuit against the Treasury Department and the IRS in 2018, in which they argued that the SALT deduction limit violates the Constitution. But a district court ruled against it in 2019, as did a Court of Appeals for the Second Circuit last October.
In their petition to the Supreme Court, the states argued that the court should take the case because “Congress’s unprecedented reduction of the SALT deduction raises a new and important question about the limits of federal tax power.” They also argue that the appellate court’s ruling is incorrect.
“Contrary to the appellate court’s reasoning, the SALT deduction is not simply a matter of grace from Congress,” argued the states. “Rather, the deduction is rooted in the structural limitations imposed on the federal government by the basic principles of federalism in the Constitution.”
The petition to the Supreme Court comes as Democrats are discussing the possibility of lowering the SALT deduction limit as part of a broad social and climate spending package. The House passed a version of the bill in November that would raise the limit to $ 80,000. But Senate Democrats are expected to take a different approach, due to concerns by some that the House provision would provide benefits to high-income families.
Senate Democrats have yet to announce a deal on the SALT issue, and the broader spending package is in jeopardy due to opposition from Senator Joe Manchin.
One of the leading advocates in Congress for lowering the SALT deduction limit is New York Rep. Thomas Suozzi, who is running against Hochul in the Democratic primary for gubernatorial.
“Looks like @GovKathyHochul is finally getting serious about SALT. Better late than never, ”Suozzi tweeted in response to the Supreme Court’s request.
“This unfair cap has already imposed a significant financial burden on countless working middle class families in New York, and in the coming years, it is expected to cost New York taxpayers more than $ 100 billion,” said Attorney General Letitia James.
“We are filing this lawsuit to protect millions of New Yorkers from this blatant, misguided and damaging political attack. New York will not be intimidated into paying more than its fair share and we will continue to fight back.”
BUT HOW DOES IT AFFECT YOU DIRECTLY?
Let’s say a taxpayer files their 2021 tax return and decides to itemize their deductions. It reports that it pays $ 8,000 in annual property taxes and $ 5,000 in state income taxes, this under a maximum income tax rate of 22%
While this taxpayer paid $ 13,000 in state and local taxes, current law only allows him to deduct $ 10,000. Using your 22% tax rate, this deduction would reduce your 2021 income tax burden by $ 2,200 (calculated by multiplying your deduction of $ 10,000 by your 22% tax rate).
Before 2018, this same taxpayer could have saved $ 2,860 in taxes by deducting the $ 13,000 they paid in state and local taxes.
Although all taxpayers are limited to the same $ 10,000 deduction, the savings will not be the same for all taxpayers. Those in the lower tax brackets will enjoy lower savings with the SALT deduction, while those in the higher tax bracket could save up to $ 3,700 in federal income taxes.
As Negotiations on the Law Advance Build Back Better (BBB), the state and local tax deduction, or SALT, has become the latest cross-party bargaining chip in Democrats’ efforts to pass the $ 1.75 trillion social spending package.
Democratic states with high state and local taxes, such as California, New York and New Jersey, support a proposal to increase the limit on the amount of state and local taxes that people can deduct from their federal income taxes from $ 10,000 to $ 80,000 .
The SALT deduction is a way for people, especially in states where income, sales and property taxes are high, to avoid paying twice the taxes they have paid for services provided by states and localities, such as education, health care, and transportation.
Before 2017, when Republicans pushed through the Tax Cuts and Jobs Act, or TCJA, taxpayers could claim an unlimited amount as a SALT deduction.
The SALT deduction has been part of tax policy since before the federal income tax was created in 1913, and aside from a few minor changes in the 1960s and 1970s, it had not changed significantly until the 2017 revision through of the TCJA.
While the 1964 and 1978 changes to the law addressed what could be deducted, the TCJA addressed how much could be deducted.
The 2017 cap was enacted by a Republican Congress to make up for the revenue shortfall caused by lowering the marginal tax rate for top earners from 39.6% to 37% and corporate tax rates from 35% to 21%; hence the “tax cuts” portion of the bill.
Overall, according to the Tax Policy Center, the Congressional Budget Office predicted at the time that the Republican tax bill would increase the federal deficit by nearly $ 1.9 trillion during its first decade.
WHAT DOES A HIGHER LIMIT ON THE SALT DEDUCTION MEAN?
If the SALT limit changes currently being discussed for the reconciliation bill are approved, whether or not they affect your tax bill will depend on your income, where you live, and other specifics, such as whether you are owner of property.
The types of expenses that taxpayers can choose to deduct (income or sales taxes, property taxes, medical expenses, and charitable donations, for example) would not change. The amount you can deduct due to those state and local taxes, however, could.
While the 2017 deduction limit affected the highest earners, generally those earning more than $ 100,000, by increasing the amount of annual income subject to federal taxes, an increase in the deduction limit would primarily benefit those taxpayers with higher income.
Also, people with higher incomes are more likely to own property and therefore pay property taxes in their state and locality, another expense they may choose to deduct from their taxable income.
According to the Tax Policy Center, a joint project of the Urban Institute and the Brookings Institution, in 2017, only 16% of taxpayers with income between $ 20,000 and $ 50,000 claimed the SALT deduction, in contrast to 76% of taxpayers with income between $ 100 000 and $ 200,000 claimed it, and more than 90 percent of taxpayers with incomes over $ 200,000 did.
High-income people in high-tax places, primarily in blue states like California, New York, and New Jersey, are more likely to be able to claim the SALT deduction to reduce their taxable income.
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