Blue states appeal ruling in lawsuit over GOP tax law deduction cap

New York, New Jersey, Connecticut and Maryland on Tuesday filed a notice of appeal in an effort to further their legal challenge to the GOP tax law’s cap on the state and local tax (SALT) deduction.

The appeal from the four blue states comes after a federal district judge in New York dismissed their lawsuit in September. The states are appealing the district court’s ruling to the U.S. Court of Appeals for the 2nd Circuit.

“The Trump administration’s SALT policy is retribution politics – plain and simple,” New York Gov. Andrew Cuomo (D) said in a news release. “New York is already the nation’s leader in sending more tax dollars to Washington than we get back every year, and we will not allow this administration to pick the pockets of hard-working New Yorkers to fund tax cuts for corporations and send even more money to red states. We will continue to fight this unconstitutional assault until it is repealed once and for all.”

President Trump’s 2017 tax law capped the SALT deduction at $10,000 in an effort to raise revenue that could be used to help offset tax cuts elsewhere in the legislation. The cap has contributed to a small percentage of people seeing tax increases under the tax law, particularly at the high end of the income spectrum, but a majority of taxpayers were estimated to have received a tax cut for 2018 even in high-tax states.

Many Republicans defend the cap, arguing that it helps to prevent the federal tax code from subsidizing higher state taxes. But politicians in high-tax, Democratic-leaning states have blasted the cap, arguing that it punishes their states and could make it harder for their states to make investments in public services.

New York, New Jersey, Connecticut and Maryland filed their lawsuit last year against the Treasury Department and the IRS. The states argued that the SALT deduction cap violates the Constitution’s federalism principles and deliberately harms certain states and residents of those states. 

But in September, Judge J. Paul Oetken, an appointee of former President Obama, granted the administration’s motion to dismiss the case.

“The Court recognizes that the SALT cap is in many ways a novelty,” Oetken wrote in his opinion. “But the States have failed to persuade the Court that this novelty alone establishes that the SALT cap exceeds Congress’s broad tax power under Article I, section 8 and the Sixteenth Amendment.”

New York, New Jersey and Connecticut have also filed a separate lawsuit challenging IRS rules that block certain state workarounds to the SALT deduction cap. That lawsuit is still pending in federal district court in New York.