Supreme Court rejects challenge to SALT limit from New York, New Jersey

The U.S. Supreme Court has rejected a challenge from New York and three other states to overturn the $10,000 limit on the federal deduction for state and local taxes, which is known as SALT, enacted through the Republican’s 2017 tax overhaul. 

The order denied a request from New York, Connecticut, Maryland and New Jersey to review an October ruling from the U.S. Court of Appeals for the Second Circuit, which rejected arguments that the SALT cap is an “unconstitutional assault” on the states’ taxing decisions.

“This decision by the Supreme Court underlines the fact that any change to the SALT cap will come from an intentional act of Congress, not through the courts,” said Garrett Watson, senior policy analyst at the Tax Foundation.

“The legal challenges to the cap itself were always a longshot, so this decision by the Supreme Court to decline the review of the case was not totally unexpected,” he said.

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The SALT cap has been a pain point for high-tax states because residents can’t deduct more than $10,000 in state and local levies on their federal returns. And some lawmakers from these areas have been fighting for relief as part of a Congressional SALT Caucus.

With a slim Democratic majority, the $10,000 limit was a sticking point in Build Back Better negotiations, and House lawmakers in November passed an $80,000 SALT cap through 2030 as part of their $1.75 trillion spending package. However, Sen. Joe Manchin, D-W.Va., blocked the plan in the Senate, halting momentum for SALT relief. 

“I do expect this decision will revive some discussion about if and how the deduction cap should be changed moving forward, especially in the context of any revised Build Back Better package in Congress,” Watson said.

“There remains skepticism of SALT cap changes in both chambers, which may make any legislative attempt to alter the cap an uphill battle at best,” he added.

Without an extension from Congress, the $10,000 SALT limit will automatically sunset in 2026, along with several tax breaks from the Republican legislation.

In the meantime, many states have SALT cap workarounds for pass-through businesses, allowing owners to bypass the limit by paying for part of their state taxes through their company.  

While the SALT cap has been a hot-button issue in high-tax states and Congress, there are other economic factors to consider, policy experts say.

“There was the pandemic, and the economic recovery from the pandemic, and these are the things that are driving current state policy decisions, not the state and local tax deduction,” said Richard Auxier, senior policy associate at the Urban-Brookings Tax Policy Center.

Those affected by the $10,000 SALT limit are affluent homeowners with “the ability to make a lot of political noise,” he said, and many have benefited from other provisions of the Tax Cuts and Jobs Act.

If repealed, the top 20% of taxpayers may receive over 96% of the relief, according to a Tax Policy Center report, which would affect only 9% of American households.