When the Biden administration faces off against multistate coalitions in federal court, it’s usually fighting a group of Republican-led states over some high-stakes policy change or emotionally charged culture-war issue. Red-state attorneys general have sued the federal government over immigration, environmental regulation, LGBT rights, and more since President Biden took office last year, with varying degrees of success.
In New York v. Yellen, the Biden administration faces a legal challenge from some of its closest allies. A coalition of deep-blue states has asked the Supreme Court to intervene in a simmering dispute over a tax deduction, and late last month the Justice Department urged the justices to reject its arguments. The two sides find themselves defending things that they might otherwise not: for blue states, the high tax bills of their wealthiest residents and for the Biden administration, a vindictive piece of Trump-era legislation that could harm some of the president’s allies and supporters.
The case focuses on the state and local tax deduction, more commonly known as the SALT deduction. The tax-code provision generally allows people to deduct their state and local tax payments when they file their federal taxes. Congress first included the deduction in 1913 shortly after the Sixteenth Amendment’s ratification gave it the power to levy an income tax. Its defenders argue that it protects Americans from “double taxation” by harmonizing state, local, and federal taxes.
That changed in 2017 when Republicans passed the Tax Cuts and Jobs Act. The tax-code overhaul was a bonanza for the richest Americans; everyone else saw few benefits from it. But it capped the SALT deduction, which had previously been unlimited, at $10,000 each year, making it an outlier provision because it fell harder on Americans who already pay high state income and property taxes. The SALT-deduction cap added tens of thousands of dollars to the final tax bills of sufficiently wealthy residents of states such as California and New York.
Why would the typically anti-tax Trump and his allies make such a move? GOP leaders were trying to pressure blue states to lower taxes for their wealthiest citizens—and cut social programs accordingly. “I would argue we’re propping up profligate, big-government states and we’re having states that actually got their act together pay for states that didn’t,” then-Speaker Paul Ryan claimed during deliberations over the tax-code changes in 2017. “It’s finally time to say, hey, make sure that your politicians do a good job of running your state,” former President Donald Trump said in an interview that year as well on the subject. “Otherwise, you are not going to benefit.”
The states have countered that they paid far more in federal taxes than they received in federal spending even before the SALT cap’s imposition. Efforts to reverse the SALT-deduction cap in Congress have run aground even though Democrats control both chambers and the White House. For some blue-state lawmakers, the issue was significant enough that they formed their own caucus around its repeal. Last April, a group of House Democrats from New York told Speaker Nancy Pelosi and Senate Majority Leader Chuck Schumer that the issue “is so critical to our state and our constituents that we will reserve the right to oppose any tax legislation that does not include a full repeal of the SALT limitation.”
But that drumbeat ran afoul of the rest of the party’s messaging, which opposes tax cuts for wealthy Americans. New York Representative Alexandria Ocasio-Cortez described a potential SALT-cap repeal as a “giveaway to the rich” and a “gift to billionaires” even as she conceded that it might be unfair to blue-state residents. The New York Times’ editorial board, which also opposed repeal, noted that 54 percent of the benefits of repeal would go to the wealthiest 1 percent of households, which would “on average [be] paying about $36,000 less per year in federal income taxes.”
New York, New Jersey, Connecticut, and Maryland sued the federal government in 2018 to overturn the cap. The states argue that the SALT deduction is constitutionally required. While the Constitution itself says nothing about SALT deductions and gives broad authority to Congress to determine income tax rates, the states contend that the deduction’s existence is “rooted in the structural limitations placed on the federal government by basic federalism principles in the Constitution,” as they put it in their Supreme Court petition. By capping it, they argued, Congress “interfered with [the states’] sovereign taxing authority by unduly coercing [them] to change their sovereign tax policies and by denying [them] equal sovereignty.”
The lower courts uniformly rejected the states’ claims, and the Supreme Court has yet to indicate whether it will take the case.
The equal-sovereignty argument is a familiar one to liberals and Democrats for the wrong reason: It was the principle used by the Supreme Court’s conservative majority in the 2013 Shelby County v. Holder decision, which gutted a key provision of the Voting Rights Act of 1965 because it purportedly violated the “equal sovereignty” of a handful of states. Though the Second Circuit Court of Appeals rejected the coalition’s logic, the states raised it again before what they apparently thought might be a more receptive audience. “[The Second Circuit’s] analysis disregards the fact that even a facially neutral statute may transgress federalism principles if Congress has engaged in [the] ‘disparate treatment of States,’” the states argued, quoting from Shelby County.
In its response brief, the Biden administration makes a straightforward argument: The SALT deduction is the product of Congress’s constitutional authority over income taxes, so it has the discretion to create, destroy, or alter them as it sees fit. The administration also challenged the states’ claim that the deduction had been effectively unaltered since its introduction in 1913, noting that Congress had expanded it and contracted it before. But the thrust of its argument, couched in neutral legalese, was that the states’ claim to a constitutional right to SALT deductions is nonsensical.
“The necessary legal premise of petitioners’ argument is that Congress, having historically permitted a particular deduction from taxable income, is obligated to preserve that deduction in perpetuity,” the Justice Department told the court in its reply brief. “But petitioners point neither to any provision of the Constitution nor to any precedent of this Court to support that proposition.” And while the department did not characterize the cap as “coercive,” as the states have, it nonetheless noted that the Supreme Court “has long recognized that Congress may, through its enactments, provide ‘incentives’ for States to legislate or regulate in particular ways.”
The Justice Department might ultimately have the upper hand on the legal and constitutional arguments here. But it is still striking to see the Biden administration defend its predecessors’ strong-arming of blue-state governments—just as it is strange to see blue-state governments invoking Shelby County, an anathema in liberal circles, to overturn it for the benefit of their richest citizens. Legislative efforts to repeal the SALT cap are stalled: House Democrats agreed to a compromise that would raise it to $80,000 per year, but it was part of the broader Build Back Better Act, which ran aground in the Senate last fall. So if the blue states’ lawsuit does not go anywhere, neither, in all likelihood, will the divide over the SALT cap.