The U.S. Supreme Court on Monday rejected an attempt by Democratic-led states to get a massive tax cut for the rich.
The court has declined to review a challenge brought by New York, Connecticut, New Jersey, and Maryland to the $10,000 federal cap on state and local property and income tax deductions, also known as the SALT cap.
In the 2017 tax reform law signed by former President Donald Trump, Congress imposed a limit on how much in state and local tax payments individuals could deduct from their federal income tax payments. The measure was included as a revenue cost offset to income and corporate tax cuts included in the law, needed to meet a House budget reconciliation requirement that no more than $1.5 trillion would be added to the federal deficit over a 10-year budget period.
Ironically, while congressional Democrats attacked the whole tax reform law as a massive tax break for the wealthy, Democratic-run states were particularly opposed to the SALT cap because it increased the federal tax burden of their wealthiest residents. New York and the other states sued, arguing that Congress had violated the Constitution by interfering with the states' ability to levy taxes.
"Congress’s taxing authority (as set forth in Article I, Section 8 and the Sixteenth Amendment) is cabined by the structural requirements of federalism, which prevent the federal government from directly interfering with the States’ ability to generate revenue to sustain their operations," the states argued in a March court filing. "The long history of federal income taxation demonstrates that Congress and the States equally understood that a deduction for all or nearly all state and local property and income taxes was constitutionally required to preserve state sovereign taxing authority."
The Supreme Court on Monday rejected this argument and declined to hear the lawsuit without issuing an explanation.
Congressional Democrats tried and failed to repeal the SALT deduction cap in 2019, and the party has been divided on this issue during negotiations over a budget reconciliation package for President Joe Biden's $1.75 trillion Build Back Better economic agenda.
House Democrats in 2021 passed a bill that would raise the SALT deduction cap to $80,000 through 2031, when it would return to $10,000. But Republicans are opposed to changing the tax law, and the bill has not advanced in the United States Senate. Some progressive Democrats are also opposed to eliminating the SALT cap, acknowledging that more than 90% of the benefit would go to the top 20% of earners, according to the Tax Policy Center.
Rep. Alexandria Ocasio-Cortez (D-N.Y.) tweeted in September that "a full 100% SALT repeal means major tax breaks for extremely high-net worth individuals and billionaires. Why do that?"
It is unlikely that Congress will come to an agreement to repeal or limit the SALT cap before the midterm elections in November, when Republicans are widely expected to reclaim a legislative majority and put the issue to rest.
The current SALT deduction cap will expire in 2025.