Four state governments are continuing their lawsuit against the federal government to vindicate their supposed right to have the taxes they levy on their citizens be fully deductible from those citizens’ federal taxes. This lawsuit has not had much luck in the courts and is not expected to start having any now that the states have gone to the Supreme Court. I took a look at it anyway because, in their initial legal complaint, the states had misleadingly cited a Corner post of mine.
They’ve dropped that part of the argument, but what’s left is not a lot better.
The states want full deductibility because their high-earning constituents want it, because it keeps more money in their jurisdiction, and because it relieves pressure to cut state taxes and spending. The Republicans who controlled Congress and the presidency in 2017 capped the deduction to raise money to offset tax cuts, to raise that money in a way that mostly spared Republican voters, and to cut what they saw as an improper subsidy from low-tax states to high-tax states.
The lawsuit says full deductibility is implicitly in the Constitution, part of its federalist structure. But even if it isn’t, the lawsuit says that when Republicans capped deductibility they were impermissibly trying to get liberal states to change how they govern themselves.
This part of the lawsuit has two difficulties: Everyone concedes that the federal government may encourage states to adopt certain policies even if it cannot coerce them, and legislators usually have multiple motives for what they enact. So the states have to establish that capping the deduction puts too much pressure on state governments to change their policies and that coercing them was the “dominant” purpose of the cap.
The states try to equivocate their way to this conclusion. Their evidence consists entirely of statements by public officials that suggest, in their view, that the cap was put in place “at least in part” to “compel” states to cut taxes and spending (p. 10). By the end of their filing, “to pressure” states has become “a dominant purpose” (p. 22).
They cite four officials’ statements; presumably they’re the best ones they’ve got. Paul Ryan, as speaker of the House, said twice that without a cap, low-tax states were subsidizing high-tax ones. Steve Mnuchin, as treasury secretary, said, “I do hope” state governments would restrain their taxes and spending after the cap. Then-president Donald Trump said the cap would give voters in the states an incentive to “make sure that your politicians do a good job of running your state.” On the face of it, none of these statements indicates that any officials believed the cap would command or coerce the states to do anything.
The case these four blue states are making is thus uncompelling in multiple senses of the word, and the justices should have no trouble kicking it to the curb.