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SALT Tax-Cap Challenge by New York and New Jersey Is Tossed

Chris Dolmetsch and Laura Davison

(Bloomberg) -- Four states in the eastern U.S. lost a legal challenge to a provision of the 2017 law that limited write-offs for state and local taxes, as a federal judge threw out a lawsuit seeking to block the cap.

The Republicans’ 2017 tax law capped the amount of state and local tax, or SALT, deductions, which had been unlimited, to $10,000. Democrats in Congress and some state lawmakers said the change targeted Democratic-led states that tend to have higher taxes. New York Governor Andrew Cuomo called it “economic civil war.”

On Monday, U.S. District Judge J. Paul Oetken threw out a lawsuit over the cap filed last year by New York, New Jersey, Connecticut and Maryland. The judge said the federal government has the “exhaustive” power to impose and collect income taxes and that the states can enact their own tax policies as they wish.

“To be sure, the SALT cap, like any other feature of federal law, makes certain state and local policies more attractive than others as a practical matter,” Oetken said. “But the bare fact that an otherwise valid federal law necessarily affects the decisional landscape within which states must choose how to exercise their own sovereign authority hardly renders the law an unconstitutional infringement of state power.”

Read More: The U.S. Cut Taxes. Why Fewer Folks Got Refunds

Cuomo, one of the most vocal opponents of the SALT cap, said New York is considering appealing the decision.“The bottom line is this policy is unprecedented, unlawful, punitive and politically motivated -- and it must be stopped,” he said in a statement.

Connecticut Attorney General William Tong said the SALT cap “is an abusive and discriminatory tax hike on Connecticut. This disappointing decision makes it harder for our state to protect its taxpayers from the disproportionately harmful effects of Trump’s tax law. We are in close coordination with other impacted states to consider next steps.”

The attorneys general of New York and New Jersey declined to comment on the ruling. An email seeking comment from Maryland’s attorney general wasn’t immediately returned.

Lawmakers in high-tax states have been trying to overturn the limit on SALT deductions since the law passed nearly two years ago. The cap was one of the most politically contentious provisions in the tax overhaul.

In Congress, Democrats on the House Ways and Means Committee may consider legislation next month that would allow taxpayers to take larger SALT deductions. That bill will probably pass the House but will almost certainly be blocked in the Republican-controlled Senate.

The case is State of New York v. Mnuchin, 18-cv-6427, U.S. District Court, Southern District of New York (Manhattan).

(Updates with comment from Connecticut attorney general under blue Read More link.)

To contact the reporters on this story: Chris Dolmetsch in Federal Court in Manhattan at cdolmetsch@bloomberg.net;Laura Davison in Washington at ldavison4@bloomberg.net

To contact the editors responsible for this story: David Glovin at dglovin@bloomberg.net, Peter Jeffrey

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