The new tax law includes a cap of $10,000 on the deductibility of state and local taxes. Four states — New York, Connecticut, Maryland, and New Jersey — are suing to undo that cap. (You can check out this news account or the text of the complaint.) These states say that the Constitution requires an uncapped deduction.
They say that by capping the deduction, Congress has attempted to push the states to adopt different fiscal policies than the ones they have — to encourage them to cut their level of spending and taxes. This attempt, they further say, violates their sovereignty as states.
The argument seems to me pretty far-fetched. If it were valid, then wouldn’t every matching grant the federal government provides a state also be unconstitutional? Every such grant attempts to bring about, and has the effect of encouraging, a different set of state fiscal priorities than would exist without the grant.
I am even more confident in rejecting paragraph 107 of the complaint. Here it is in full:
Shortly before the enactment of the 2017 Tax Act, Republican sponsors’ true purpose in imposing the new cap on the SALT deduction became apparent: to coerce a handful of States with relatively high taxpayer-funded public investments — States that are primarily Democratic leaning — to change their tax policies. As one conservative commentator explained, “[t]he fact that these tax increases will fall most heavily on ‘blue’ parts of the country is obviously not an accident.”75 An economist who advised President Trump’s campaign was more explicit about the purpose of changing the SALT deduction: “‘It’s death to Democrats.’”76
I’m the “conservative commentator” mentioned; footnote 75 refers to this Corner post of mine from last November. The post argued against the idea that an earlier version of the tax bill, which repealed the state-and-local deduction altogether, was designed to punish blue states. Here’s the sentence immediately following the one the lawsuit quotes: “Republicans think they need to limit some deductions to make up some of the lost revenue from other parts of tax reform, and doing that in a way that minimizes the pain to their own constituents is bound to appeal to them.” Later, I note that if one assumes that the state-and-local-tax deduction is unjustified, its repeal eliminates a subsidy from red states to blue ones.
I think, and have written elsewhere, that it would be a good thing if the scaling back of the deduction leads state and local governments to retrench. But I certainly don’t think, and have never said, that scaling back the deduction coerces states and should be celebrated for coercing them. And the post quoted in the lawsuit doesn’t come within hailing distance of that sentiment.