Rep. Judy Chu, D-California, speaks during a press conference announcing the State and Local Tax Caucus (SALT) outside the United States Capitol.
Sarah Silbiger | Bloomberg | Getty Images
The U.S. Supreme Court has dismissed a challenge by New York and three other states seeking to strike down the $10,000 limit on the federal deduction for state and local taxes, known as SALT, enacted as part of of the 2017 Republican tax overhaul.
The order denied a request by New York, Connecticut, Maryland and New Jersey to review an October decision by the United States Court of Appeals for the Second Circuit, which rejected arguments that the SALT cap is an “unconstitutional assault” on state tax rulings. .
“This Supreme Court decision underscores the fact that any changes to the SALT cap will come from an intentional act of Congress, not the courts,” said Garrett Watson, senior policy analyst at the Tax Foundation.
“Legal challenges to the cap itself have always been long-running, so this Supreme Court decision to decline to review the case was not entirely unexpected,” he said.
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The SALT cap has been a sore point for high-tax states because residents cannot deduct more than $10,000 in state and local levies on their federal returns. And some lawmakers in those areas have fought for relief as part of a congressional SALT caucus.
With a narrow Democratic majority, the $10,000 limit was a sticking point in Build Back Better negotiations, and House lawmakers in November passed an $80,000 SALT cap through 2030 as part of their $1.75 trillion spending program. However, Sen. Joe Manchin, DW.Va., stalled the plan in the Senate, halting the momentum for SALT relief.
“I expect this decision to reinvigorate a discussion on whether and how the deduction cap should be changed in the future, particularly in the context of any revised Build Back Better package in Congress,” said said Watson.
“There remains skepticism about SALT cap changes in both chambers, which could make any legislative attempt to change the cap an uphill battle at best,” he added.
Without a Congressional extension, the $10,000 SALT limit will automatically expire in 2026, along with several tax breaks from Republican legislation.
Meanwhile, many states have SALT cap workarounds for intermediary businesses, allowing owners to circumvent the limit by paying a portion of their state taxes through their business.
Although the SALT cap has been a hot issue in high-tax states and in Congress, there are other economic factors to consider, policy experts say.
“There’s been the pandemic and the post-pandemic economic recovery, and those are the things that are driving current state policy decisions, not the state and local tax deduction,” said Richard Auxier, partner. Principal in Policy at Urban-Brookings Tax Policy. Center.
Those affected by the $10,000 SALT limit are wealthy homeowners with “the ability to make a lot of political noise,” he said, and many have benefited from other provisions of the Tax Cuts and Jobs Act.
If repeal, the top 20% of taxpayers could receive more than 96% of the relief, according to a Tax Policy Center report, which would affect just 9% of U.S. households.