Supreme Court Rejects Appeal Over SALT Deduction Cap

Appeal questions constitutionality and targeting of the Cap

The Supreme Court declined to hear an appeal from four states that would have repealed the State And Local Tax (SALT) deduction cap, which was put in place by the Tax Cuts and Jobs Act of 2017. The cap blocks taxpayers from deducting more than $10,000 per year in their state and local taxes when itemizing federal deductions. The court’s denial was tucked into a 17-page Monday order list and did not include any reasoning from any of the justices. 

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 deemed that the SALT cap was within Congress’s broad authority over tax policy to impose the so-called SALT deduction cap and was in line with other laws which have different effects from place to place.

States with high state and property taxes argued that the SALT limitation infringed on their State’s sovereignty of creating tax policy as they see fit and that the SALT tax fails to treat states equally. The courts’ opinions disagree with Plaintiff-States’  determining that their arguments were based upon the policy’s effect on their respective states and not because the cap applied to some states but not others.   

The limit on the SALT deduction was one of the most significant revenue-raising provisions of the 2017 Tax Cuts and Jobs Act. It was needed to offset tax cuts to meet the House reconciliation requirement that the legislation contributes no more than $1.5 trillion to the federal deficit over the 10-year budget window.

The Joint Committee on Taxation, Congress’s nonpartisan scorekeeper on tax matters, estimated that the cap and related provisions would raise close to $700 billion in revenue over the cap’s effective term.

Without an extension from Congress, the law scheduled the cap to expire in 2025, which means the amount of the deduction would return to being unlimited after that.

In the meantime, nearly half the states with a state income tax are offering SALT cap workarounds for the write-off limit for certain businesses such as partnerships, S-corporations, and some LLCs, allowing owners to bypass the limit for part of their state taxes through their businesses. Several other states have pending legislation.

One particular workaround is the Pass-through Entity Tax (PTET). PTET is an optional tax that allows eligible businesses to shift the payment of state income taxes to the business. Those income taxes can then be fully deducted for federal tax purposes by the business.

The IRS issued guidance on these state-level tactics in November 2020, offering the green light to eligible businesses.

At present, state policymakers will be left to their own legislative fixes to provide taxpayers with relief from a $10,000 cap on state and local tax deductions.  However, this ruling may revive some discussion about if and how the deduction cap should be changed moving forward, whether as a standalone issue or in the context of revised build-back better initiatives.