Professional Tax Research Solutions from the Founder of Kleinrock. tax and accounting research
Parker Tax Pro Library
Accounting News Tax Analysts professional tax research software Like us on Facebook Follow us on Twitter View our profile on LinkedIn Find us on Pinterest
federal tax research
Professional Tax Software
tax and accounting
Tax Research Articles Tax Research Parker's Tax Research Articles Accounting Research CPA Client Letters Tax Research Software Client Testimonials Tax Research Software Federal Tax Research tax research

Accounting Software for Accountants, CPA, Bookeepers, and Enrolled Agents

Second Circuit Shoots Down States' Constitutional Challenges to SALT Deduction Cap

(Parker Tax Publishing October 2021)

The Second Circuit affirmed a district court's ruling rejecting four states' constitutional challenges to the $10,000 limit on the deduction for state and local taxes (SALT) under Code Sec. 164(b)(6) enacted by the Tax Cuts and Jobs Act. The court found that the SALT deduction is not constitutionally mandated and that the $10,000 cap on the deduction is a valid exercise of Congress's authority to influence tax policy rather than an unconstitutional coercion to change the states' fiscal policies. State of New York v. Yellen, 2021 PTC 323 (2d Cir. 2021).


The state and local tax deduction under Code Sec. 164 has long permitted taxpayers to deduct from their taxable income all the money paid in state and local income and property taxes (SALT). In 2017, however, Congress passed the Tax Cuts and Jobs Act (TCJA) (Pub. L. 115-97) which added Code Sec. 164(b)(6). That provision imposes a $10,000 cap on the SALT deduction (SALT deduction cap). The immediate impact of the new cap was felt most acutely in states where the state and local tax liability of residents often exceeds the $10,000 maximum. Four of the states most affected - New York, Connecticut, New Jersey, and Maryland - sued the federal government in a district court, asserting that the SALT deduction cap either is unconstitutional on its face or that it unconstitutionally coerces them to abandon their preferred fiscal policies. In State of New York v. Mnuchin, 2019 PTC 375 (S.D. N.Y. 2019), the district court dismissed the states' complaint for failure to state a claim. The states appealed to the Second Circuit.

The states argued that the SALT cap is unconstitutional because, under the Sixteenth Amendment, a deduction is required for all or a significant portion of state and local taxes. According to the states, Congress was constitutionally foreclosed from eliminating or curtailing the SALT deduction because it had never done so until 2017. The states contended that principles of federalism protect each state's sovereign authority to raise revenue and determine their own fiscal priorities and bar the federal government from crowding states out of traditional revenue sources. The states further argued that the SALT cap violated the Tenth Amendment by coercing them to abandon their preferred fiscal policies in favor of lower taxes and reduced spending. According to the states, their taxpayers were likely to bear the brunt of the SALT deduction cap as a disproportionate share of their taxpayers' state and local tax burdens exceed the $10,000 maximum. The states argued that the cap therefore increased the effective cost of state and local property taxes, making homeownership more expensive, depressing home equity values, and leading to job losses in their states.

The government argued that the states lacked standing because their claims of lost tax revenues as a result of the SALT cap were a generalized grievance that is not cognizable for purposes of standing. It also asserted that the states' lawsuit was barred by the Anti-Injunction Act, codified in Code Sec. 7421(a), which prohibits lawsuits brought for the purpose of restraining the assessment or collection of any tax.


The Second Circuit affirmed the judgment of the district court. First, the Second Circuit found that the states had standing and that their claims were not barred by the Anti-Injunction Act. In the court's view, the states' loss of tax revenues as a result of a decrease in the frequency and price at which taxable real estate transactions occur was a specific injury that sufficed to support standing. The court also found that the Anti-Injunction Act applies only when Congress has provided an alternative legal avenue to challenge the validity of a tax and concluded that the states had no alternative avenue other than to bring an action in a federal court.

Turning to the merits, the court rejected the states' Sixteenth Amendment argument after finding that they failed to show how the SALT deduction cap unconstitutionally undermined their state sovereign authority over fiscal matters or their ability to raise revenue. In the court's view, the states failed to plausibly allege that their taxpayers' total federal tax burden is now so high that they cannot fund themselves. The court said that while the states argued that the SALT deduction lowers "the effective cost of state and local taxes," the states pointed to nothing that compelled the federal government to protect taxpayers from the true costs of paying their state and local taxes.

The court rejected the states' argument that Congress's power to limit the deduction is subject to constitutional limitations. The court explained that even if the Constitution is silent, a limitation on Congress's power can be inferred from historical understanding and practice. The court noted that there have long been individual legislators who believed the SALT deduction reflected good tax policy and equitably divided scarce resources between the federal government and the states, but found that their voices had over time been drowned out by the overall statutory history of the deduction. For instance, in 1986, Congress eliminated the deduction for state and local sales taxes, and curtailed the deduction again in 1990 when it introduced the so-called Pease limitation which reduced the deduction amount for taxpayers with adjusted gross incomes exceeding certain specified thresholds. The court inferred from these changes that, prior to 2017, Congress did not view its authority to limit the SALT deduction as subject to any relevant constitutional constraints.

The court also found that the states failed to state a Tenth Amendment claim. The court explained that Congress may use its taxing and spending authority to influence states' policy choices but that such pressure may not amount to compulsion. The court observed that the Supreme Court has only once - in National Federation of Independent Business v. Sebelius (NFIB), 2012 PTC 167 (S. Ct. 2012) - deemed a condition unconstitutionally coercive in violation of the Tenth Amendment. In NFIB, the issue was Congress's threat to withhold all of a state's Medicaid grants unless the state accepted expanded funding and complied with the conditions that came with it. The Second Circuit said that two factors especially drove the result in NFIB. First, Congress had required that the states comply with the conditions to receive not only new Medicaid funding but also Medicaid funding (upon which the states had come to rely) that would have been available even under the preexisting regulatory scheme. Second, Congress had threatened to withhold funds constituting over 10 percent of state budgets.

The Second Circuit agreed with the district court that the states were making an improper comparison by alleging that their taxpayers will pay hundreds of millions of dollars in additional federal taxes, relative to what they would have paid had Congress enacted TCJA without the SALT cap. In the court's view, this told it nothing about the actual financial effects of cap on the states' taxpayers. Moreover, the court found that even if such a comparison were instructive, the cost to individual taxpayers paled in comparison to the threatened deprivation of 10 percent of the states' budgets at issue in NFIB. The court said there were similar problems with the states' claims regarding the effect of the SALT cap on home equity values. While the states contended that the cap could cause home equity values in New York state alone to plummet by over $60 billion, in-state spending to decrease by $1.26 to $3.15 billion, and the economy to lose up to 31,300 jobs, the court said that without baseline figures to put these numbers in context, it was implausible that the amounts in question gave rise to a constitutional violation.

The Second Circuit also rejected the states' argument that the SALT deduction cap violated the principle of equal sovereignty among the states and unfairly targeted them. The court reasoned that the outsized effect of the cap on the states arose only because those states previously benefited most from the SALT deduction, not because the cap applies to some states and not others. In the court's view, the SALT deduction cap is not unlike countless federal laws whose benefits and burdens are unevenly distributed across the country and among the states. The court conclude that at most, the states' allegations reflected that lawmakers were focused on the permissible legislative purpose of influencing tax policy.

For a discussion of the deduction of state and local income taxes, see Parker Tax ¶83,125.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

Parker Tax Pro Library - An Affordable Professional Tax Research Solution.

Professional tax research

We hope you find our professional tax research articles comprehensive and informative. Parker Tax Pro Library gives you unlimited online access all of our past Biweekly Tax Bulletins, 22 volumes of expert analysis, 250 Client Letters, Bob Jennings Practice Aids, time saving election statements and our comprehensive, fully updated primary source library.

Parker Tax Research

Try Our Easy, Powerful Search Engine

A Professional Tax Research Solution that gives you instant access to 22 volumes of expert analysis and 185,000 authoritative source documents. But having access won’t help if you can’t quickly and easily find the materials that answer your questions. That’s where Parker’s search engine – and it’s uncanny knack for finding the right documents – comes into play

Things that take half a dozen steps in other products take two steps in ours. Search results come up instantly and browsing them is a cinch. So is linking from Parker’s analysis to practice aids and cited primary source documents. Parker’s powerful, user-friendly search engine ensures that you quickly find what you need every time you visit Our Tax Research Library.

Parker Tax Research Library

Dear Tax Professional,

My name is James Levey, and a few years back I founded a company named Kleinrock Publishing. I started Kleinrock out of frustration with the prohibitively high prices and difficult search engines of BNA, CCH, and RIA tax research products ... kind of reminiscent of the situation practitioners face today.

Now that Kleinrock has disappeared into CCH, prices are soaring again and ease-of-use has fallen by the wayside. The needs of smaller firms and sole practitioners are simply not being met.

To address the problem, I’ve partnered with a group of highly talented tax writers to create Parker Tax Publishing ... a company dedicated to the idea that comprehensive, authoritative tax information service can be both easy-to-use and highly affordable.

Our product, the Parker Tax Pro Library, is breathtaking in its scope. Check out the contents listing to the left to get a sense of all the valuable material you'll have access to when you subscribe.

Or better yet, take a minute to sign yourself up for a free trial, so you can experience first-hand just how easy it is to get results with the Pro Library!


James Levey

Parker Tax Pro Library - An Affordable Professional Tax Research Solution.

    ®2012-2021 Parker Tax Publishing. Use of content subject to Website Terms and Conditions.

IRS Codes and Regs
Tax Court Cases IRS guidance