New York v. Yellen, No. 19-3962 (2d Cir. 2021)
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The Plaintiff States filed suit alleging that the $10,000 cap on the federal income tax deduction for money paid in state and local taxes (SALT), enacted as part of the 2017 Tax Cuts and Jobs Act, violates the United States Constitution.
The Second Circuit affirmed the district court's grant of defendants' motion to dismiss for failure to state a claim and denial of the States' cross-motion for summary judgment. The court concluded that the States had standing and that their claims were not barred by the Anti-Injunction Act (AIA). However, the court rejected the States' contention that the SALT deduction is constitutionally required by the text of Article I, Section 8 and the Sixteenth Amendment of the Constitution, and thus the SALT deduction cap effectively eliminates a constitutionally mandated deduction for taxpayers. Rather, the court concluded that the Constitution itself does not limit Congress's authority to impose a cap. In this case, the States' arguments mimic those that the Supreme Court rejected in South Carolina v. Baker, 485 U.S. 505, 515–27 9 (1988). In Baker, the Court held that Congress had the power to tax interest earned on state-issued bonds even though it had not previously done so. The court also concluded that the SALT deduction cap is not coercive in violation of the Tenth Amendment or the principle of equal sovereignty.
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