In what could rank among the least surprising federal court rulings of this or any year, a U.S. District Court judge in Manhattan has rejected New York’s constitutional challenge to the state and local tax (SALT) deduction cap in the new federal tax law.

New York had been joined by the states of Connecticut, Maryland and New Jersey in a lawsuit claiming that Congress lacked the power to impose a $10,000 limit on SALT deductions under the Tax Cuts and Jobs Act (TCJA), signed by President Trump at the end of 2017.

[Here’s a longer post from July 2018 explaining why the lawsuit amounted to “a mashup of half-baked numbers, dubious factual assertions and (largely well-founded) political arguments masquerading as constitutional jurisprudence.”]

In a 37-page opinion made public today, Judge Paul Oetken rejected the states’ core argument that Congress lacked the power to cap SALT deductions.

Also unsurprisingly, Governor Cuomo disagreed with the ruling, saying he was “evaluating all options, including appeal.”

In a brief statement, the governor asserted (for the umpteenth time) that the new tax law “is costing New Yorkers another $15 billion each year.”  That statement is false—or, as Judge Oetken more delicately put it, based on a “false assumption.” The $15 billion figure reflects only the estimated value of lost SALT deductions, without the offsetting tax rate cuts and other changes that will collectively save money for the vast majority of New York residents.

Cuomo’s statement accused Trump and congressional Republicans of “target[ing] New York and other blue states by funding tax cuts for corporations and the rich on the backs of New Yorkers.” But as Cuomo himself implicitly acknowledges in other contexts, the negative impact of the SALT cap is actually concentrated on New York’s rich, especially high earners subject to New York City’s added local income tax.  Earlier this year, the governor was alarmed by a potential fall in revenues from wealthy taxpayers most affected by the SALT cap. As he put it then: “Tax the rich. Tax the rich. Tax the rich. We did. Now, God forbid the rich leave.”

Although the judge didn’t touch on this detail, the TCJA delivered a much bigger tax cut to the middle- and lower middle-class than to the “rich” in general, and raised taxes mainly on the top 1 percent in New York and a handful of other states with high marginal income tax rates.

What the judge said

The judge also rejected arguments that the SALT cap was a form of coercion designed to force them into changing their tax policies. The states, he said, had “failed to show that the financial burden their taxpayers will experience as a result of the SALT cap is any more severe than the sort of burden that might accompany any other statewide economic disappointment.”

He added:

And, having failed to make such a showing, the States are unable to take the necessary further step of plausibly suggesting that the SALT cap puts them to the forced choice of lowering tax rates or facing budgetary catastrophe. Indeed, at argument, counsel for the States as much as conceded that the cap’s “budgetary implications are difficult to predict and pinpoint.”

In at least two respects, however, Oetken’s opinion was oddly uninformed.

The second sentence of his opinion says the federal tax law “took the novel step of placing an upper limit” on SALT. But the limit on SALT wasn’t “novel” at all. For decades prior to 2017, a sizable subset of taxpayers—larger in New York than in most states—were subject to the Alternative Minimum tax (AMT), which disallows any deduction for SALT, among other things.

The TCJA significantly reduced the number of households subject to the AMT, effectively restoring a partial SALT deduction for hundreds of thousands of mostly affluent New Yorkers. Based on publicly released details of his 2017 return, Cuomo himself may have saved nearly $10,000 in federal taxes last year—thanks, mainly, to the the new tax law’s AMT rollback.

In addition to the AMT change, Congress in 1991 enacted the so-called “Pease” provision, capping all itemized deductions, including SALT, for high-income taxpayers. As the Tax Foundation noted in this backgrounder, the Pease cap was effectively a surtax, kicking in on incomes as low as $500,000.

Property values

Oetken also accepted at face value what he called “the entirely plausible theory” that the elimination effectively would raise the cost of property taxes, which by extension will reduce property values, “thereby discouraging home sales and decreasing the revenues the States are able to collect by taxing such sales.” This, in the judge’s opinion, provided the states with standing to sue.

So far, however, there’s no evidence of a broad decline in home prices in the wake of the SALT cap. In the Hudson Valley, a leading data barometer described residential sales as a “mixed bag” in the second quarter of 2019; as of August, year-over-year sales prices were up slightly in three of four counties while total sales were down. On Long Island (including Queens) the Multiple Listing Service reported that sales prices were up slightly but the number of houses for sale was growing at a faster rate. In New Jersey, realtors reported a bigger year-over-year decline in house sales but also a larger increase in sales prices in August than was seen in the New York suburban markets.

Still pending, also in the U.S. District Court for the Southern District, is a separate lawsuit filed by the states of New York, Connecticut and New Jersey to challenge an Internal Revenue Service (IRS) rule disallowing the use of government-sponsored charitable entities as a way to work-around the SALT deduction limit.