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The decision comes amid debate in Congress over whether to roll back the $10,000 limit on a write-off for state and local taxes.
Four states challenging the $10,000 cap on a federal deduction people can claim for state and local taxes they've paid suffered another legal defeat on Tuesday, failing to convince a three-judge appeals court panel that the limit on the tax break is unconstitutional.
New York, Connecticut, Maryland and New Jersey filed a lawsuit in 2018 against the Treasury Department and the IRS over the cap, which was adopted as part of Republicans' 2017 rewrite of the tax code. The states argued that the limit on the so-called "SALT" deduction ran afoul of various parts of the Constitution and trammeled states' authority to set tax policy and raise revenues.
But the 2nd U.S. Circuit Court of Appeals rejected those arguments in a 3-0 decision, upholding a 2019 district court ruling against the states.
"We are not persuaded that the cap unconstitutionally infringes on state sovereignty," Judge Raymond Lohier, a judicial nominee of former President Barack Obama, wrote in the opinion.
Debate in Congress Over Future of Cap
The ruling comes as lawmakers in Congress from higher-tax states, most of them Democrats, are pushing to undo the cap.
They're seeking to do so as Democratic lawmakers and the Biden administration attempt to pass a broader agenda that includes $1.2 trillion infrastructure legislation and a $3.5 trillion package—which lawmakers are now discussing how to downsize—that is focused on areas like health care, education and the environment.
One possibility that's been floated on Capitol Hill is repealing the cap for two years. Another option under consideration is to raise the cap to a higher level and keep it in place beyond its 2025 expiration.
What will happen with the tax break is now wrapped up in broader and complex negotiations within the Democratic party over how to proceed with the two pending pieces of major legislation.
On the liberal end of the political spectrum, critics of lifting the cap typically take the position that the SALT deduction primarily benefits wealthier taxpayers. There is data to show that this is the case. But lawmakers from places like New Jersey and New York contend that the $10,000 limit is also squeezing middle-income households.
Raising or eliminating the cap would mean that the federal government collects less in taxes because people would be able to claim more in deductions. Repealing the cap would cost the federal government roughly $85 billion per year, according to estimates cited by the Committee for a Responsible Federal Budget.
The watchdog group's president, Maya MacGuineas, pointed out last month when criticizing the possible repeal of the cap that for the annual cost of that change, lawmakers could enact plans for universal pre-K, free community college, paid family leave, affordable child care and an Earned Income Tax Credit expansion.
"Not just one of these policies, but all of them together," she added.
Taxpayers can claim the deduction against state and local property taxes, and either income or sales taxes.
'Not Unlike' Countless Federal Laws
Those who back the repeal of the $10,000 ceiling on the tax break often make a case that it unfairly hits taxpayers hardest in Democratic-leaning states with higher taxes and higher incomes. They say that, in this way, Republicans used the policy as a political cudgel.
Tuesday's ruling addresses related arguments along these lines from the states that challenged the cap.
"It is obviously true that members of Congress were aware that the SALT deduction cap would adversely affect some States more than others," Judge Lohier wrote. "But the SALT deduction cap is not unlike the countless federal laws whose benefits and burdens are unevenly distributed across the country."
The four states that brought the lawsuit, Lohier added, "point us to nothing that compels the federal Government to protect taxpayers from the true costs of paying their state and local taxes."
The Maryland attorney general's office did not respond to a request for comment on the ruling. New Jersey's attorney general's office declined to comment. New York Attorney General Letitia James' office said that it did not have a comment at this time.
A spokesperson for Connecticut Attorney General William Tong said his office was, "reviewing the decision and evaluating next steps."
Correction: A previous version of this story misstated the dollar amount of the infrastructure legislation. It is $1.2 trillion, not $1.5 trillion.
Bill Lucia is a senior editor for Route Fifty and is based in Olympia, Washington.
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