State Of New York et al v. Mnuchin et al

Filing 1

COMPLAINT against David J Kautter, Steven T. Mnuchin, United States Department of Treasury, United States Internal Revenue Service, United States Of America. (Filing Fee $ 400.00, Receipt Number 0208-15330056)Document filed by State of Maryland, State Of Connecticut, State Of New York, State of New Jersey. (Attachments: #1 Exhibit 1, #2 Exhibit 2, #3 Exhibit 3, #4 Exhibit 4, #5 Exhibit 5)(Olsen, Caroline)

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UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF NEW YORK
STATE OF NEW YORK,
STATE OF CONNECTICUT,
STATE OF MARYLAND, and STATE OF
NEW JERSEY,

Civil Action No. 18-cv-6427

Plaintiffs,

COMPLAINT FOR DECLARATORY
AND INJUNCTIVE RELIEF

v.

JURY REQUESTED

STEVEN T. MNUCHIN, in his official capacity
as Secretary of the United States Department
of Treasury; the UNITED STATES
DEPARTMENT OF TREASURY; DAVID J.
KAUTTER, in his official capacity as Acting
Commissioner of the United States Internal
Revenue Service; the UNITED STATES
INTERNAL REVENUE SERVICE; and the
UNITED STATES OF AMERICA,
Defendants.

INTRODUCTION
1.

The States of New York, Connecticut, Maryland, and New Jersey (the “Plaintiff

States”) bring this action seeking declaratory and injunctive relief to invalidate the new $10,000
cap on the federal tax deduction for state and local taxes (“SALT”). Congress has included a
deduction for all or a significant portion of state and local taxes in every tax statute since the
enactment of the first federal income tax in 1861. The new cap effectively eviscerates the SALT
deduction, overturning more than 150 years of precedent by drastically curtailing the deduction’s

1

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scope. As the drafters of the Sixteenth Amendment 1 and every subsequent Congress have
understood, the SALT deduction is essential to prevent the federal tax power from interfering with
the States’ sovereign authority to make their own choices about whether and how much to invest
in their own residents, businesses, infrastructure, and more—authority that is guaranteed by the
Tenth Amendment and foundational principles of federalism. The new cap disregards Congress’s
hitherto unbroken respect for the States’ distinct and inviolable role in our federalist scheme. And,
as many members of Congress transparently admitted, it deliberately seeks to compel certain States
to reduce their public spending. This Court should invalidate this unconstitutional assault on the
States’ sovereign choices.
2.

As used in this complaint, “SALT deduction” refers to the federal individual

income tax deduction for all or a substantial portion of state and local (i) real and personal property
taxes, (ii) income taxes, and (iii) sales taxes. Until the 2017 federal tax overhaul, Congress
consistently provided a deduction for all or a substantial portion of state and local taxes. In the
most recent iteration of the deduction prior to the 2017 tax overhaul, federal tax law permitted
federal taxpayers who itemized their tax deductions to deduct, subject to certain incidental
limitations, all of their state and local real and personal property taxes, and either state and local
income taxes or sales taxes.
3.

A SALT deduction has been a part of every federal income tax law since the first

federal income tax was enacted in 1861. The deduction is necessary to ensure that the exercise of
the federal government’s tax power does not unduly interfere with the sovereign authority of the

1

The Sixteenth Amendment to the United States Constitution was ratified in 1913 and
provides: “The Congress shall have power to lay and collect taxes on incomes, from whatever
source derived, without apportionment among the several States, and without regard to any census
or enumeration.”
2

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States to determine their own taxation and fiscal policies by crowding the States out of traditional
revenue sources, like income, property, and sales taxes. The SALT deduction further ensures that
States have the prerogative to determine the appropriate mix and level of public investments to
make on behalf of their residents, as well as the authority to choose how to raise revenue to pay
for those investments. The new cap on the SALT deduction will raise the federal tax liability of
millions of taxpayers within the Plaintiff States. And by increasing the burden of those who pay
substantial state and local taxes, the new cap on the SALT deduction will make it more difficult
for the Plaintiff States to maintain their taxation and fiscal policies, hobbling their sovereign
authority to make policy decisions without federal interference.
4.

The necessity of protecting the States’ sovereign authority to determine their own

taxation and fiscal policies was an explicit concern for the Founders at the time of the ratification
of the Constitution. That necessity informed all decisions about imposing the first federal income
tax during the Civil War, and it was confirmed in the subsequent enactment history of the Sixteenth
Amendment.
5.

The longstanding statutory deduction is based on Congress’s historic understanding

that a deduction for all or a significant portion of state and local taxes is constitutionally required
because it reflects structural principles of federalism embedded in the Constitution. The Founders
were deeply concerned that the federal government would exercise its tax power to encroach upon
the original and sovereign authority of the States to raise revenues through taxes. To avoid this
possibility, the Founders reserved to the States concurrent authority to levy taxes. When the
Constitution was ratified, it was widely understood that the federal government could not abrogate
the States’ sovereign tax authority, and that the federalism principles embedded in the Constitution
would constrain the federal government’s tax power.

3

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6.

Since Congress enacted the first federal income tax in 1861, Congress has provided

a deduction for all or a significant portion of SALT in every federal income tax law, respecting
federalism constraints on its taxing power and the concurrent tax authority of the sovereign States.
This uninterrupted practice provides strong evidence that the federal government lacks
constitutional authority to drastically curtail the deduction.
7.

The ratification history of the Sixteenth Amendment provides further confirmation

that Congress’s unprecedented curtailment of the deduction cannot be reconciled with the limits
on the federal government’s tax powers under Article I, Section 8 and the Sixteenth Amendment
to the United States Constitution. When the States agreed to ratify the Sixteenth Amendment, they
did so on the understanding that the federal government’s income tax power was and would remain
subject to federalism constraints, and that the federal government was required to accommodate
the sovereign tax power of the States when it imposed a federal income tax. Moreover, federal
income tax measures considered immediately before and after ratification expressly included a
SALT deduction. This history demonstrates that the States approved the federal government’s
authority to tax income subject to longstanding federalism principles, including the requirement
that the federal government could not drastically curtail the scope of the SALT deduction.
8.

On December 22, 2017, following a rushed and highly partisan process, the federal

government reversed over 150 years of precedent by enacting sweeping tax legislation that, among
other things, eviscerated the deduction for state and local taxes. Effective 2018, individual and
married taxpayers filing jointly may deduct only up to $10,000 for their combined state and local
(i) real and personal property taxes, and (ii) income taxes or sales taxes. For married taxpayers
filing separately, each taxpayer is limited to a $5,000 deduction. See An Act to Provide for
Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal

4

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Year 2018 (the “2017 Tax Act” or “Act”), Pub. L. No. 115-97, § 11042, 131 Stat. 2054 (2017)
(H.R. 1).
9.

The new cap on the SALT deduction is unprecedented, unlawful, and will cause

significant and disproportionate injury to the Plaintiff States and their residents.
10.

The new cap will significantly increase the amount of taxes residents in Plaintiff

States will pay to the federal government. For example, when considering the effect of the 2017
Tax Act with and without the new cap on the SALT deduction, the new cap will be responsible for
New York taxpayers paying an additional $14.3 billion in federal taxes in tax year 2018, and an
additional $121 billion between 2018 and 2025, the year when the new cap is set to expire. The
other Plaintiff States will experience similar effects. This revenue is a primary means by which
Congress is offsetting the cost of the tax cuts in the 2017 Tax Act.
11.

While taxpayers in the Plaintiff States will bear the cost of paying for the new tax

cuts, they will receive the least benefit from the 2017 Tax Act. As a percentage of each State’s
population, more taxpayers in the Plaintiff States will experience a tax increase relative to
taxpayers in other States because of the 2017 Tax Act. And relative to the amount of taxes the
taxpayers in the Plaintiff States were paying to the federal government before the 2017 Tax Act,
they will receive a disproportionately small share of the tax cuts. By unfairly benefiting taxpayers
of other States at the expense of the taxpayers of Plaintiff States, the 2017 Tax Act injures the
Plaintiff States’ sovereign and quasi-sovereign interests.
12.

In addition to disproportionately harming the Plaintiff States relative to others, the

new cap on the SALT deduction will cause significant and irreparable direct harm to the Plaintiff
States and their taxpayers.

5

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13.

Among other things, the new cap on the SALT deduction is likely to substantially

decrease home values in the Plaintiff States, hurting both in-state homeowners and the Plaintiff
States themselves. Under the law before the 2017 Tax Act, homeowners could deduct the full cost
of property taxes on their federal income taxes. By capping the deduction, the 2017 Tax Act
increases the cost of owning a home, which, in turn, depresses home values.
14.

Homes are the most valuable assets many homeowners possess. With depressed

home prices, many homeowners will lose the equity on which they depend to finance retirement,
school tuition, and other investments. Homeowners will also have less to spend on goods and
services, which, in turn, will lead to decreased business sales, lower the Plaintiff States’ revenue,
and curtail their economic growth.
15.

By reducing the wealth of taxpayers in the Plaintiff States and undermining the

States’ revenue sources, the new cap on the SALT deduction will ultimately make it more difficult
for the States to maintain their current taxation and fiscal policies, and deprive the Plaintiff States
of the ability to raise revenue in the future. These effects will force the Plaintiff States to choose
between their current level of public investments and higher tax rates. By interfering with the
States’ sovereign authority in this way, the new SALT deduction cap violates bedrock principles
of federalism enshrined in the Tenth Amendment, and it exceeds the federal government’s tax
powers under Article I, Section 8 and the Sixteenth Amendment to the U.S. Constitution.
16.

This interference with the States’ sovereign authority is particularly egregious

because Congress enacted the cap on the SALT deduction with the purpose of coercing a handful
of States to change their taxation and fiscal policies. During the debates on the 2017 Tax Act,
executive officials and Republican legislators—the legislation received no Democratic votes in
either house of Congress—issued press statement after press statement making clear their intention

6

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to injure the Plaintiff States. For example, President Trump stated that the new cap on the SALT
deduction was intended to force States like New York and the other Plaintiffs States to change
their policies or they were “not going to benefit” from the 2017 Tax Act. In Secretary Mnuchin’s
words, the new cap on the SALT deduction was intended to “send a message” to the Plaintiff States
that they need to alter the choices they have made about publicly investing in their States’ residents
and businesses. And as a Republican legislator acknowledged, the new cap on the SALT deduction
was intended to “kick” Plaintiff States—an assault that proponents hoped would force the Plaintiff
States to change their policy choices.
17.

Because Congress acted with the purpose and effect of forcing the Plaintiff States

to change their taxation and fiscal policies, the new cap also violates principles of equal state
sovereignty. The Constitution guarantees each State equal authority to control its sovereign affairs,
including the ability to determine state taxation and fiscal policy. Without a compelling purpose,
the federal government may not target a few States for unfavorable treatment to coerce those States
into changing their sovereign policy choices.
18.

The 2017 Tax Act violates this constitutional guarantee. The Plaintiff States have

exercised their sovereign authority to adopt taxation and fiscal policies that support vital public
investments that benefit their residents. Because a bare congressional majority of one party
disagrees with the Plaintiff States’ policy choices, Congress enacted the new cap on the SALT
deduction with the purpose and effect of coercing the Plaintiff States into reducing taxes and
cutting the vital public investments and services those taxes support. The new cap thus constitutes
a purposeful invasion of the sovereign authority of a handful of States to determine their own
taxation and fiscal policies without a compelling justification.

7

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19.

For all of these reasons, the Plaintiff States seek a declaration that the new cap on

the SALT deduction violates the U.S. Constitution, and an injunction barring the new cap’s
enforcement.
JURISDICTION AND VENUE
20.

The Court has jurisdiction over the action under the provisions of 28 U.S.C.

§§ 1331, 1340, and 2201.
21.

Venue is proper in this district pursuant to 28 U.S.C. § 1391(b)(2)

and § 1391(e)(1)(B).
PARTIES
22.

The Plaintiff States are all sovereign States of the United States of America.

23.

Attorney General Barbara D. Underwood brings this action on behalf of the State

of New York at the request of Governor Andrew M. Cuomo to protect the interests of New York
and its residents. The Attorney General is the chief law officer of the State and is authorized to file
civil suits directly involving the State’s rights and interests. See N.Y. Executive Law § 63(1).
Among other things, the Attorney General is empowered to protect New York’s sovereign tax
authority. See N.Y. State Const. art. XVI, § 1.
24.

Attorney General George Jepsen brings this action on behalf of the State of

Connecticut at the request of Governor Dannel P. Malloy to protect the interests of Connecticut
and its residents. See Conn. Gen. Stat. § 3-5. The Attorney General is Connecticut’s chief legal
officer with general supervision over all civil legal matters in which the State is an interested party.
Id. § 3-125.
25.

Plaintiff the State of Maryland is represented by and through the Attorney General

of Maryland, Brian Frosh, its chief legal officer, with general charge, supervision, and direction of
8

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the State’s legal business. The Attorney General’s powers and duties include acting on behalf of
the State and the people of Maryland in the federal courts on matters of public concern. Under the
Constitution of Maryland, and as directed by the Maryland General Assembly, the Attorney
General has the authority to file this suit to challenge the actions by the federal government, which
threaten the public interest and welfare of Maryland residents. Md. Const. art. V, § 3(a)(2); Joint
Resolution 1, 2017 Md. Laws.
26.

Plaintiff the State of New Jersey is represented by and through the Attorney General

Gurbir S. Grewal, the State’s chief legal officer. Attorney General Grewal has the authority to file
this suit to protect the sovereign interests of the State. See N.J. Stat. Ann. § 52:17A-4(e), (g).
27.

As explained below, the Plaintiff States and their residents will suffer legally

cognizable harm because of the new cap on the SALT deduction, and an order invalidating the
new cap would redress the Plaintiff States’ injuries. Accordingly, the Plaintiff States have standing
to bring this action.
28.

Congress has not provided an alternative procedure for the Plaintiff States to

challenge the constitutionality of the new $10,000 cap on the SALT deduction.
29.

Defendant Steven Mnuchin is the Secretary of the U.S. Department of Treasury and

is responsible for overseeing the Department of Treasury and the Internal Revenue Services (IRS).
See 26 U.S.C. § 7801; 31 U.S.C. § 301. He is sued in his official capacity.
30.

Defendant the U.S. Department of Treasury is an executive department that

oversees the IRS. See 26 U.S.C. § 7801.
31.

Defendant David J. Kautter is the Acting Commissioner of the IRS and is

responsible for overseeing the IRS, including its implementation and enforcement of the 2017 Tax
Act. See 26 U.S.C § 7803. He is sued in his official capacity.

9

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32.

Defendant the IRS is a federal tax-collection agency that is responsible for the

implementation and enforcement of the internal revenue laws, including the 2017 Tax Act. See 26
U.S.C § 7803.
33.

Defendant the United States of America includes all government agencies and

departments responsible for the passage and implementation of the 2017 Tax Act.
ALLEGATIONS
I.

CONGRESS’S CONSTITUTIONAL POWER TO IMPOSE AN INCOME TAX IS LIMITED
BY ITS OBLIGATION TO PROVIDE A DEDUCTION FOR ALL OR A SIGNIFICANT
PORTION OF STATE AND LOCAL TAXES.
34.

The Supreme Court has made clear that Congress’s powers vis-à-vis the States must

be construed in light of history. See, e.g., Printz v. United States, 521 U.S. 898, 905-18 (1997). As
the Court recently explained, the “lack of historical precedent” for a new assertion of congressional
power is “[p]erhaps the most telling indication” of a “severe constitutional problem.” Free
Enterprise Fund v. Public Co. Accounting Oversight Bd., 561 U.S. 477, 505 (2010) (quotation
marks omitted). Measured by history, the new cap and its drastic curtailment of the SALT
deduction is unprecedented.
35.

The power to tax was an original power of the sovereign States that has never been

surrendered. When the States formed the union, they consented to give the federal government a
concurrent power to tax, but only to the extent that federal power could not be exercised to abrogate
the sovereign authority of the States to establish their own taxation and fiscal policies. At
ratification, it was widely understood that the federalism principles enshrined in the Constitution
would serve as a check on the federal government’s tax power.
36.

Recognizing this structural limitation on its power to tax, the federal government

has always respected the sovereign tax authority of the States by providing a deduction for all or a

10

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substantial portion of state and local taxes as part of the federal income tax. Indeed, since the
federal government first exercised its income tax power in 1861, Congress has included such a
deduction in every federal income tax law. Relying on this constitutional guarantee and
uninterrupted practice, the States have structured their own state tax regimes around the federal
SALT deduction.
37.

The ratification history of the Sixteenth Amendment provides further confirmation

that a deduction for all or a significant portion of state and local taxes is constitutionally required.
When the States ratified the Sixteenth Amendment, they confirmed the historic limitations on the
federal government’s income tax power. At the time of the amendment’s ratification, it was widely
understood that, to the extent the federal government taxed income, it would provide a deduction
for all or a significant portion of state and local taxes. The States—including the Plaintiff States—
relied upon this understanding in making the decision to ratify the Sixteenth Amendment.
38.

The longstanding understanding that a deduction for all or a significant portion of

state and local taxes is constitutionally required has remained the law until the recent tax overhaul,
when Congress not only reversed over 150 years of precedent by imposing the new cap, but did so
with the purpose of coercing the Plaintiff States into changing the choices they have made about
publicly investing in their residents and businesses. Press statements from President Trump,
Secretary Mnuchin, and Republican legislators make clear that the new cap on the SALT deduction
was intended to “send a message” to the Plaintiff States that they must change their public policy
choices or suffer. As explained below, these statements stand in stark contrast to the last 150 years
of federal tax law, which has respected the States’ sovereign authority.

11

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A. The Founders understood the federal government’s tax power to be
limited by the sovereign and co-equal tax sovereignty of the States.
39.

The power to tax and spend is a sovereign function of the States that predates the

formation of the United States. See, e.g., Lane County v. Oregon, 74 U.S. 71, 76 (1868). The States
have always retained their sovereign right to determine their own taxation and fiscal policies, and
that sovereign authority imposes a structural check on the tax power of the federal government.
As explained below, the Founders designed the Constitution to ensure that the federal government
could not exercise its tax power to abrogate the States’ sovereign tax authority, or to use its own
tax power to coerce the States into changing or abandoning their own taxation and fiscal policies.
40.

For much of the colonial period, taxes were levied primarily by colonial

governments, which raised revenues from a diverse array of property and income taxes, among
other sources. 2 When, in the late eighteenth century, the Crown attempted to increase its own taxes,
the colonies waged a war to preserve their right to self-government, including the right to
determine their own taxation and fiscal policies. 3
41.

Following the failures of the Articles of Confederation, the Founders recognized

the necessity of creating a national government with the power to tax, but they were also deeply
concerned that giving the federal government an unlimited tax power would encroach on the

2

The precursor to the modern income tax, known as the faculty tax, was levied by colonial
governments as early as the 1630s. See Alvin Rabushka, Taxation in Colonial America 165, 17078, 206-07 (2008); Edwin R.A. Seligman, The Income Tax: A Study of the History, Theory, and
Practice of Income Taxation at Home and Abroad 367-68 (2d ed. 1914). Although the colonies
paid some taxes to the British government, external taxes were relatively low until the decades
before the Revolutionary War and consisted largely of import duties and royal quitrents—i.e., land
taxes imposed in lieu of a service obligation—not income or property taxes. See Rabushka, supra,
at 715, 866.
3

See, e.g., Rabushka, supra note 2, at 1, 144.
12

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States’ traditional revenue sources. 4 This concern pervaded the state debates about ratification. As
a prominent contemporaneous legal scholar explained, “[w]hen the constitution of the United
States was under the consideration of the state conventions, there was much concern expressed on
the subject of the general power of taxation over all objects of taxation, vested in the national
government.” 5
42.

Although the Founders were particularly concerned with the possibility of the

federal government’s direct interference with the States’ tax powers, the ratification debates make
clear that the Founders understood that creating a federal tax power could also interfere with state
sovereignty. 6
43.

To prevent such encroachment, the Founders adopted a dual federalist structure and

reserved to the States a concurrent tax authority. As Alexander Hamilton explained during the
ratification debates, “the individual States would, under the proposed Constitution, retain an
independent and uncontrollable authority to raise revenue to any extent of which they may stand
in need, by every kind of taxation, except duties on imports and exports.” 7 Further protections were
afforded to the States in the Guarantee Clause, which ensures, among other things, the power of
the States “to set their legislative agendas” and to determine their own “form” and “method” of
self-government. New York v. United States, 505 U.S. 144, 185 (1992). 8

4

See, e.g., Sarah F. Liebschutz & Irene Lurie, The Deductibility of State and Local Taxes,
16 Publius 51, 52 (1986).
5

1 James Kent, Commentaries on American Law 367 (O. Halsted ed., 1826).

6

See, e.g., The Federalist No. 33 (Hamilton) (Congress.gov) (arguing that the federal
government could not use its tax power to abrogate a land tax imposed by a State).
7

Id. (emphasis added).

8

See U.S. Const. art. IV, § 4 (“The United States shall guarantee to every State in this
Union a Republican Form of Government, and shall protect each of them against Invasion; and on
13

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44.

In 1791, the Founders solidified these protections when they ratified the Tenth

Amendment, confirming that because the power to tax was reserved to the States, the federal
government could not exercise its own tax power in such a way as to encroach upon the States’
sovereign tax authority. 9 By reserving to the states a concurrent power to tax, and thereby imposing
structural limits on the federal government’s tax power, the Founders ensured that the federal
government could not use its new tax power to undermine the sovereign authority of the States to
determine how to make public investments and how to tax their residents to support those
investments. The right of the States to determine their own taxation and fiscal policies is thus
enshrined in the federalist structure of the Constitution, as well as the Guarantee Clause and the
Tenth Amendment.
B. Pre-Sixteenth Amendment practice confirms Congress’s consistent understanding
and practice that its income tax power cannot be exercised without providing a
deduction for all or a significant portion of state and local taxes.
45.

While the Founders were principally concerned with direct federal interference

with state tax authority (such as a federal statute abrogating a state tax), the actions of the early
Congresses reflected a broader understanding of the need to refrain from exercising the federal tax
power in the domains in which the States had traditionally exercised their tax authority. In the
decades following the adoption of the Constitution, most taxes were levied by the States, not the

Application of the Legislature, or of the Executive (when the Legislature cannot be convened)
against domestic Violence.”).
9

See U.S. Const. amend. X (“The powers not delegated to the United States by the
Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the
people.”); see also, e.g., Thomson v. Pacific R.R. Co., 76 U.S. 579, 591 (1869) (explaining that
“the power to tax all property, business, and persons” was a power “original in the States” and that
was never “surrendered” to the federal government); N.Y. State Const. art. XVI, § 1 (“The power
of taxation shall never be surrendered, suspended or contracted away, except as to securities issued
for public purposes pursuant to law.”).
14

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federal government. To the extent the federal government imposed its own taxes, it respected the
federalism principles enshrined in the Constitution by levying customs duties and excise taxes,
rather than taxing revenue sources traditionally taxed by the States, such as property and income. 10
When the federal government did attempt to tax incomes—a tax power traditionally exercised by
the States—it accommodated the sovereign authority of the States by providing a deduction for all
or a significant portion of state and local taxes. These accommodations reflected Congress’s
consistent understanding that the revenue sources traditionally taxed by the States should be
largely free from the interference that would result from concurrent federal taxation.
46.

Congress first considered imposing an income tax during the War of 1812. At that

time, lawmakers reaffirmed the views expressed by the Founders about the dangers of the federal
government imposing a tax that would interfere with the States’ ability to generate revenue from
traditional sources. To guard against such interference, an initial proposal for a federal income tax
exempted entirely state and local taxes from federal taxation, providing that the federal income tax
would extend “only to such capital or employments as are not taxed by any existing laws.” 11
Although never adopted, this early proposal makes clear that early Congresses understood that the
application of federal taxes to sources already taxed by the States would interfere with the States’
own tax authority, and that, in the context of the income tax, the federal government was required
to accommodate the States by exempting from taxation the income that taxpayers pay towards
state and local taxes.
10

See Roy G. Blakey & Gladys C. Blakey, The Federal Income Tax 2 (1940); see also
Seligman, supra note 2, at 389, 397-406 (describing the history of the income tax as adopted by
the States until the Civil War).
11

28 Annals of Cong. 1079 (Jan. 18, 1815) (emphasis added); see also U.S. Treasury, State
of the Treasury, No. 438, 13th Cong., 3d Sess., in 2 American State Papers, Finance 885, 887
(1815) (proposing consideration of an income tax to fund the War of 1812).
15

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47.

Congress adhered to this understanding when it eventually adopted the first federal

income tax in 1861. 12 Despite the nation’s desperate need for revenue during the Civil War, the
first federal income tax provided a deduction for “all national, state, or local taxes assessed upon
the property, from which the income is derived.” 13 As legislators stressed, the deduction was
necessary to ensure that the federal tax did not burden the States’ own ability to raise tax revenue—
a power that had been reserved to the States under the federalism guarantees of the Constitution.
For example, House Ways and Means Committee member Justin Smith Morrill explained: “It is a
question of vital importance to [the States] that the General Government should not absorb all their
taxable resources—that the accustomed objects of State taxation should, in some degree at least,
go untouched. The orbit of the United States and the States must be different and not conflicting.” 14
Committee Chairman Thaddeus Stevens made similar comments, explaining that Congress was
primarily concerned with avoiding “double taxation,” and that it was a paramount goal of the
drafters to “exclud[e] from this tax the articles and subjects of gain and profit which are taxed in
another form.” 15 Although the Civil War income tax was modified several times, the deduction for
SALT was inviolable and remained in effect until the federal income tax was repealed in 1872. 16

12

See generally Blakey & Blakey, supra note 10, at 4 (discussing the 1861 income tax).

13

Act of Aug. 5, 1861, ch. 45, § 49, 12 Stat. 292, 309.

14

Cong. Globe, 37th Cong., 2d Sess. 1194 (1862).

15

Cong. Globe, 37th Cong., 2d Sess. 1577 (1862).

16

See Act of July 1, 1862, ch. 119, § 91, 12 Stat. 432, 473-74; Act of June 30, 1864, ch.
173, § 117, 13 Stat. 223, 281; Act of March 3, 1865, ch. 78, 13 Stat. 469, 479; Act of March 2,
1867, ch. 169, § 13, 14 Stat. 471, 478; Act of July 14, 1870, ch. 255, § 9, 16 Stat. 256, 258. See
generally Seligman, supra note 2, at 435-68 (discussing the Civil War income tax).
16

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48.

The Civil War income tax—and its deduction for state and local taxes—provided

“an important precedent” for subsequent federal income-tax regimes. 17 When the federal income
tax was briefly revived between 1894 and 1895, legislators modeled the tax on the Civil War
precedent, 18 providing a broad deduction for “all national, State, county, school, and municipal
taxes, not including those assessed against local benefits, paid within the year.” 19 At the time, there
was virtually no debate about the SALT deduction; its inclusion was a foregone conclusion. As
even an opponent of the bill acknowledged, there was no question that individuals would be
“allowed to deduct their taxes.” 20
49.

The 1894 federal income tax was ultimately short-lived. In 1895, the Supreme

Court held the tax unconstitutional because it was a direct tax that had not been apportioned. See
Pollock v. Farmer’s Loan & Trust Co., 158 U.S. 601 (1895); see also U.S. Const. art. I, § 2.
Nonetheless, the 1894 income tax, like its Civil War predecessor, reflected Congress’s
longstanding constitutional understanding of the type of SALT deduction it was required to
provide to avoid interfering with the States’ ability to raise tax revenue from the same sources.
And as the Supreme Court has recognized, this kind of uninterrupted historical understanding is
important evidence of the constitutional limitations on Congress’s power. See, e.g., Free
Enterprise Fund, 561 U.S. at 505.

17

Blakey & Blakey, supra note 10, at 5.

18

See Seligman, supra note 2, at 508.

19

Act of August 27, 1894, ch. 349, § 28, 28 Stat. 509, 553.

20

26 Cong. Rec. 6,888 (1894) (statement of U.S. Senator David B. Hill); see also Seligman,
supra note 2, at 505 (describing Senator Hill’s opposition to the income tax on States’ rights
grounds).
17

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C. When the States ratified the Sixteenth Amendment, they affirmed the structural
limits on the federal government’s tax power and the constitutional necessity of a
deduction for all or a significant portion of state and local taxes.
50.

In the years following Pollock, the federal government’s power to impose an

income tax was unsettled. A number of proposals to restore a federal income tax—all of which
included a deduction for all or a significant portion of state and local taxes 21—were introduced in
Congress, but none passed until after the ratification of the Sixteenth Amendment. 22 As explained
below, the ratification process of the amendment and the legislative enactments immediately
following ratification make clear that both Congress and the States understood the federal
government’s income tax powers to be constrained by federalism, and that the federal government
cannot drastically curtail the SALT deduction without running afoul of that constraint.

21

See, e.g., H.R. 5, 62d Cong. § 2 (1911) (proposing an income tax that included a
deduction for “all national, State, county, school, and municipal taxes, not including those assessed
against local benefits”); H.R. 110, 61st Cong. § 2 (1909) (same); H.R. 1473, 61st Cong. § 2 (1909)
(same); H.R. 2110, 61st Cong. § 2 (1909) (same); H.R. 21216, 60th Cong. § 2 (1908) (same); H.R.
10548, 60th Cong. § 2 (1907) (same); H.R. 345, 60th Cong. § 2 (1907) (same).
In 1909, Congress considered a proposed income tax sponsored by Senator Joseph Bailey
as an amendment to the Payne-Aldrich Tariff Act. The proposal, which was modeled on the 1894
income tax, included a deduction for SALT. See 44 Cong. Rec. 2444 (May 27, 1909) (“Provided,
however, that it be proper to deduct from such gains, profits, and income . . . all national, state,
county, town, district, and municipal taxes, not including those assessed against local benefits
. . . .”). Although not adopted, the proposal sparked Congress’s consideration of the Sixteenth
Amendment. Both the constitutional amendment and the tariff bill, sans income tax, passed in
Congress in the summer of 1909. See S.J. Res. 40, 61st Cong., 36 Stat. 184 (1909) (Sixteenth
Amendment); Payne-Aldrich Tariff Act, ch. 6., 36 Stat. 11 (1909); see also Taft Tax Message Fails
to Unite Party, N.Y. Times, June 17, 1909, at 4 (describing a message from President Taft to
Congress recommending that Congress pass the tariff bill without an income tax but consider a
separate amendment to the Constitution authorizing an income tax).
22

The Sixteenth Amendment provides that “Congress shall have the power to lay and
collect taxes on incomes, from whatever source derived, without apportionment among the several
States, and without regard to any census or enumeration.”
18

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51.

After Congress voted to adopt the Sixteenth Amendment in the summer of 1909, a

four-year-long ratification process began in the States. Across the country, state legislators raised
concerns about the federalism implications of the proposed amendment, fearing that it would
expand the federal government’s power at the expense of the States. Indeed, the States’ rights
argument “was the most frequently voiced reason for opposing the amendment.” 23 As explained
below, the assurances made by the supporters of the Sixteenth Amendment to overcome these
federalism concerns provide critical evidence about the Amendment’s original meaning and
confirm the constitutional limitations that the 2017 Tax Act transgresses by capping the SALT
deduction.
52.

A number of States engaged in extended debates concerning the Sixteenth

Amendment’s impact on state taxation powers. New York played a leading role in these debates. 24
In January 1910, then-Governor (and later Chief Justice of the U.S. Supreme Court) Charles Evans
Hughes delivered a widely circulated message (the “Hughes Message”) to the New York
Legislature opposing ratification on federalism grounds. 25 Although Hughes’s primary concern
was whether the amendment would enable the taxation of income derived from state and municipal
securities, he raised broader concerns about its implications for federalism and the balance of
power between the federal government and the States. Hughes feared that the proposed amendment
“would be an impairment of the essential rights of the State,” including the States’ ability to

23

John D. Buenker, The Ratification of the Federal Income Tax Amendment, 1 Cato J. 183,
204 (1981).
24

See John D. Buenker, The Income Tax and the Progressive Era 239, 250 (1985).

25

See id. at 255.
19

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generate revenue from traditional sources. 26 As Hughes warned, “we may desire that the Federal
Government may be equipped with all necessary National powers in order that it may perform its
National function,” but “we must be equally solicitous to secure the essential bases of State
Government.” 27
53.

Governor Hughes’s concerns gained traction throughout the United States. The

Governor of Connecticut, Frank B. Weeks, based his opposition to the amendment on the
sentiments in the Hughes Message, and Massachusetts’s legislative committee on federal relations
cited Hughes’s argument as the reason for its report opposing the amendment. State legislators in
Louisiana, South Carolina, and Utah also heavily cited the Hughes Message in their opposition to
the amendment. 28
54.

Many other States articulated similar concerns. Georgia initially voted against the

amendment, with legislators warning that “it was a grave thing for States to confer such power on
the Federal Government,” and that “it would probably be better for Georgia to adopt an income
tax law for herself and reject the proposition for a National income tax.” 29 After the Virginia
legislature rejected the amendment, one newspaper summarized the sentiments of many of the
state legislators: “It will be a long time before Virginia will set her sister States the example of
surrendering unnecessarily to the central government any important right now reserved to the
States.” 30
26

Hughes is Against Income Amendment, N.Y. Times, Jan. 6, 1910, at 2 (reproducing
Hughes’s message to the legislature).
27

Id.

28

See Buenker, supra note 24, at 264-65.

29

Georgia Avoids Income Tax, N.Y. Times, Aug. 6, 1909, at 1.

30

Decisive Blow at the Income Tax Amendment, Daily Press (Newport News, V.A.), Mar.
10, 1910, at 4; see also Views of the Virginia Editors, Times Dispatch (Richmond, V.A.), Feb. 16,
20

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55.

The various objections to the Sixteenth Amendment demonstrate that the States

understood that the primary power the amendment solidified was the concurrent power of
Congress to tax incomes. And the objections highlight that the main concern shared by the States
was that such concurrent authority would impinge on the States’ tax base and undermine a
traditional source of tax sovereignty.
56.

These vigorous objections to the Sixteenth Amendment posed a serious obstacle to

ratification, which required the assent of thirty-six States. In order to overcome these concerns, the
champions of the Sixteenth Amendment provided repeated and vigorous assurances that the
federal government’s income tax power under Article I had been subject to meaningful federalism
constraints, and that the same constraints would apply equally to the Sixteenth Amendment’s
authority to tax income. For example, U.S. Senator William Borah argued in widely publicized
statements that the federal tax power, while broad, was limited by the tax sovereignty of the States,
and that the federal government could not exercise its powers under the Sixteenth Amendment to
encroach on the States’ traditional tax authority. Borah stressed that the Sixteenth Amendment
must be construed in light of the Founders’ understanding of the federal tax power, as well as the
Founders’ desire to preserve the independent and inviolable tax sovereignty of the States, free from
federal intrusion. 31 As Borah explained, “[t]he taxing power of the United States is subject to an

1913, at 4 (“The ratification of the sixteenth amendment to the Federal Constitution seems to have
been a voluntary surrender upon the part of the States—to the national government, and appears
upon its face to relinquish an inherent State right—that of levying a tax upon incomes.”).
31

See 45 Cong. Rec. 1696-98 (Feb. 10, 1910).
21

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implied restraint arising from the existence of the powers in the State which are obviously intended
to be beyond the control of the General Government.” 32
57.

Another U.S. Senator, and a former Secretary of State and Secretary of War, Elihu

Root, echoed Borah’s arguments in a widely publicized letter sent to the New York legislature
responding to the Hughes Message. 33 Like Borah, Root argued that the proposed amendment must
“be interpreted in the light of history.” 34 In light of the longstanding constitutional understanding,
“[t]he taxing power of the Federal Government does not . . . extend to the means or agencies
through or by the employment of which the States perform their essential functions.” 35 Root further
argued that there was a “uniform, long-established, and indisputable rule” of construction that
would apply to the Sixteenth Amendment and prohibit the federal taxing power from encroaching
on “the powers or instrumentalities of the State.” 36
58.

U.S. Senator Joseph Bailey, another prominent defender of the amendment, toured

the United States and spoke before a number of state legislatures in defense of the amendment. 37

32

Id. at 1696 (emphasis added) (internal citation omitted). Borah reiterated these
sentiments in a June 1910 article, arguing that “notwithstanding the unlimited nature of the taxing
power of Congress when standing alone, it must be construed in the light of the fact that we have
a dual Government[,]” and that “[t]he decision was based upon the law of self-preservation—the
whole scope and plan of Government as outlined in the Constitution being that there were two
separate and distinct sovereignties unembarrassed by each other.” William E. Borah, Income-Tax
Amendment, 191 N. Am. Rev. 755, 758 (1910).
33

See Root for Adoption of Tax Amendment, N.Y. Times, Mar. 1, 1910, at 4 (reproducing
letter from Root to New York State Senator Frederick Davenport).
34

Id.

35

Id.

36

Id.

37

Just before Congress proposed the constitutional amendment to the States in July 1909,
Senator Bailey was the lead author of legislation to establish an income tax with a deduction for
SALT. See 44 Cong. Rec. 2444 (May 27, 1909) (text of amendment submitted by Senator Bailey);
22

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Bailey “ridicul[ed] the idea that its passage would alter the positions of the Federal government
and the States, or impair the integrity of States’ rights.” 38 He assured opponents: “It is not true that
such an amendment would abridge the rights of the State. No change but one is proposed, and that
is that the income tax should be levied upon wealth rather than population. . . . Everything the State
can do or tax now it can do after this amendment is adopted.” 39
59.

The assurances provided by Senators Borah, Root, Bailey, and others were

important in persuading New York and other States to ratify the Sixteenth Amendment. Based on
these assurances, the States understood that the new authority they were conferring on the federal
government would not empower the federal government to encroach on the States’ sovereign tax
power, including their ability to impose their own state tax regimes free from federal interference.
60.

These public declarations about the meaning of the Sixteenth Amendment also

provide insight into how Congress’s income tax power under the Sixteenth Amendment should be
construed. See, e.g., New York v. United States, 505 U.S. 144, 163-66 (1992).
61.

The drafters and defenders of the Sixteenth Amendment intended for the federal

government’s income tax powers to be constrained by the need to accommodate the States’
sovereign tax authority.

see also supra note 21 (describing how Congress opted to propose a constitutional amendment to
the States instead of immediately adopting individual income tax legislation).
38

Bailey Pleads for Income Tax, Times Dispatch (Richmond, V.A.), Mar. 2, 1910, at 1.

39

Bailey Speaks at Columbia, Watchman and Southron (Sumter, S.C.), Feb. 19, 1910, at 6.

The constitutional arguments made by the drafters and defenders of the Sixteenth
Amendment were grounded in existing Supreme Court precedent and the thinking of contemporary
legal scholars on the federalism constraints imposed on the federal tax power. See, e.g., Veazie
Bank v. Fenno, 75 U.S. 533, 541 (1869); Lane County v. Oregon, 74 U.S. 71, 77-78 (1868);
Thomas M. Cooley, The General Principles of Constitutional Law in the United States of America
61-62 (3d ed. 1898); J.I. Clark Hare, 1 American Constitutional Law 265-66 (1889).
23

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62.

When Congress first exercised its income tax power after the amendment’s

ratification in 1913, Congress respected the federalism constraints promised by the amendment’s
champions. Similar to prior federal income tax statutes, the first post-amendment federal income
tax law—the Revenue Act of 1913—included a deduction for “all national, State, county, school,
and municipal taxes paid within the year.” 40
63.

Under Supreme Court precedent, “[e]arly congressional enactments” of this nature

“provide contemporaneous and weighty evidence of the Constitution’s meaning.” Printz, 521 U.S.
at 905 (alteration and quotation marks omitted). As relevant here, the 1913 Revenue Act’s SALT
deduction establishes that Congress understood that its newly minted power to impose a federal
tax on incomes was subject to the same federalism limitations that had applied to every federal tax
statute since the Founding. 41
64.

H. Parker Willis, an economist who advised the House Banking and Currency

Committee on the 1913 Revenue Act, wrote that federalism concerns guided the drafting of the
Act. As Willis explained, Congress “desired that the question of interference with state taxes
should very carefully be safeguarded.” 42 In the context of SALT, Willis explained that the
deduction was included to ensure the federal government did not interfere with the States’ existing
tax powers. Because several States already had income tax regimes, “it was believed[] the field

40

See Revenue Act of 1913, ch. 16, § II(B), 38 Stat. 114, 167.

41

See Bowers v. Kerbaugh-Empire Co., 271 U.S. 170, 174 (1926) (explaining that “[i]t
was not the purpose or effect” of the Sixteenth Amendment “to bring any new subject within the
taxing power”).
42

H. Parker Willis, The Tariff of 1913: III, 22 J. Pol. Econ. 218, 224, 227 (1914).
24

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ought to be shared with the states.” 43 Ultimately, this was accomplished by providing for “the
general deduction of state and municipal taxes in computing income.” 44
65.

As the Supreme Court has recognized, this early post-amendment history

“provide[s] contemporaneous and weighty evidence of the Constitution’s meaning.” Printz, 521
U.S. at 905 (quotation marks omitted). And, here, it provides clear evidence that Congress’s
income tax power under the Sixteenth Amendment is limited by the requirement that it must
provide a deduction for all or a significant portion of SALT.
D. Congress has provided a deduction for all or a significant portion of
all state and local taxes in every federal income tax law since the
adoption of the Sixteenth Amendment.
66.

Since the enactment of the 1913 Revenue Act, Congress has adhered to the same

constitutional understanding: that to exercise its income tax power, the federal government must
accommodate the States’ sovereign tax authority by providing a deduction for all or a significant
portion of state and local taxes. Although Congress has imposed some incidental limitations on
the deduction in the past, the core of the deduction for state and local property and income taxes
has remained intact, across 51 different Congresses and 56 different tax acts. 45

43

Id. at 227.

44

Id.

45

See Revenue Act of 1916, ch. 463, § 5(a), 39 Stat. 756, 759 (allowing deduction for
“[t]axes paid within the year imposed . . . under the authority of any State, county, school district,
or municipality, or other taxing subdivision of any State, not including those assessed against local
benefits”); Revenue Act of 1917, ch. 63, § 1201, 40 Stat. 300, 330 (no material changes to SALT
deduction); Revenue Act of 1918, ch. 18, § 214(a)(3), 40 Stat. 1057, 1067 (no material changes to
SALT deduction); Revenue Act of 1921, ch. 136, § 214(a)(3), 42 Stat. 227, 239 (preserving SALT
deduction, but simplifying the statutory language); Revenue Act of 1924, ch. 234, § 214(a)(3), 43
Stat. 253, 270 (no material changes to SALT deduction); Revenue Act of 1926, ch. 27, § 214(a)(3),
44 Stat. 9, 26 (same); Revenue Act of 1928, ch. 852, § 23, 45 Stat. 791, 799 (same); Revenue Act
of 1932, ch. 209, § 23, 47 Stat. 169, 179-80 (same); National Industrial Recovery Act of 1933, ch.
90, 48 Stat. 195 (same); Revenue Act of 1934, ch. 277, § 23, 48 Stat. 680, 688 (preserving SALT
25

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deduction, but disallowing deduction of estate and gift taxes); Revenue Act of 1935, ch. 829, 49
Stat. 1014 (no material changes to SALT deduction); Revenue Act of 1936, ch. 690, § 23, 49 Stat.
1648, 1658-59 (preserving SALT deduction and reintroducing deduction for estate and gift taxes);
Revenue Act of 1937, ch. 815, § 1, 50 Stat. 813, 816 (no material changes to SALT deduction);
Revenue Act of 1938, ch. 289, § 23, 52 Stat. 447, 460-61 (same); Internal Revenue Code of 1939,
ch. 2, § 23, 53 Stat. 1, 12 (preserving SALT deduction in Internal Revenue Code); Revenue Act
of 1939, ch. 247, 53 Stat. 862 (1939) (no material changes to SALT deduction); Revenue Act of
1940, ch. 419, 54 Stat. 516 (same); Revenue Act of 1941, ch. 412, § 202, 55 Stat. 687, 700 (same);
Revenue Act of 1942, ch. 619, 56 Stat. 798 (same); Revenue Act of 1943, ch. 63, 58 Stat. 21
(same); Revenue Act of 1945, ch. 453, 59 Stat. 556 (same); Revenue Act of 1948, ch. 168, 62 Stat.
110 (same); Revenue Act of 1950, ch. 904, 64 Stat. 906 (same); Revenue Act of 1951, ch. 521, 65
Stat. 452 (1951); Internal Revenue Code of 1954, ch. 736, § 164(a), 68A Stat. 3, 47 (reorganizing
Internal Revenue Code and preserving SALT deduction); Technical Amendments Act of 1958,
Pub. L. No. 85-866, 72 Stat. 1606 (preserving SALT deduction without change); Revenue Act of
1964, Pub. L. No. 88-272, § 207, 78 Stat. 19, 40-42 (restructuring statute but preserving SALT
deduction and allowing a SALT deduction for gasoline taxes); Act of Oct. 27, 1972, Pub. L. No.
92-580, 86 Stat. 1276 (1972) (preserving SALT deduction but capping deduction for gasoline taxes
for residents of American Samoa); Tax Reform Act of 1976, Pub. L. No. 94-455, § 1951(3), 90
Stat. 1520, 1837 (preserving SALT deduction without change); Revenue Act of 1978, Pub. L. No.
95-600, § 111, 92 Stat. 2763, 2777 (preserving deduction but repealing deduction for a narrow
category of taxes); Crude Oil Windfall Profit Tax Act of 1980, Pub. L. No. 96-223, § 101(b), 94
Stat. 229, 250 (preserving SALT deduction without change); Act of Jan. 14, 1983, Pub. L. No. 97473, § 202, 96 Stat. 2605, 2609 (preserving SALT deduction and adding technical language about
the treatment of Indian and tribal governments); Social Security Amendments of 1983, Pub. L. No.
98-21, § 124, 97 Stat. 65, 90-91 (no material change to SALT deduction); Deficit Reduction Act
of 1984, Pub. L. No. 98-369, § 474(r), 98 Stat. 494, 844 (preserving the SALT deduction but
making technical amendments to the statute); Superfund Amendments and Reauthorization Act of
1986, Pub. L. No. 99-499, § 516, 100 Stat. 1613, 1771 (no material changes to SALT deduction);
Tax Reform Act of 1986, Pub. L. No. 99-514, §§ 134, 1432, 100 Stat. 2085, 2116, 2729 (same);
Omnibus Trade and Competitiveness Act of 1988, Pub. L. No. 100-418, § 1941(b)(2)(A), 102 Stat.
1107, 1323 (same); Technical and Miscellaneous Revenue Act of 1988, Pub. L. No. 100-647, §
1018(u)(11), 102 Stat. 3342, 3590 (same); Omnibus Budget Reconciliation Act of 1990, Pub. L.
No. 101-508, § 11111(a),104 Stat. 1388, 1388-410 (same); Omnibus Budget Reconciliation Act
of 1993, Pub. L. No. 103-66, 107 Stat. 312 (same); Small Business Job Protection Act of 1996,
Pub. L. No. 104-188, § 1704(t)(79), 110 Stat. 1755, 1891 (same); Taxpayer Relief Act of 1997,
Pub. L. No. 105-34, 111 Stat. 788 (same); Economic Growth and Tax Relief Reconciliation Act
of 2001, Pub. L. No. 107-16, 115 Stat. 38 (same); Jobs and Growth Tax Relief Reconciliation Act
of 2003, Pub. L. No. 108-27, 117 Stat. 752 (same); Working Families Tax Relief Act of 2004, Pub.
L. No. 108-311, 118 Stat. 1166 (same); American Jobs Creation Act of 2004, Pub. L. No. 108357, § 501(a), 118 Stat. 1418, 1520 (permitting deduction of state and local sales taxes); Gulf
Opportunity Zone Act of 2005, Pub. L. No. 109-135, § 403(r)(1), 119 Stat. 2577, 2628 (no material
changes to SALT deduction); Tax Increase Prevention and Reconciliation Act of 2005, Pub. L.
No. 109-222, 120 Stat. 345 (2006) (same); Tax Relief and Health Care Act of 2006, Pub. L. No.
109-432, § 103(a), 120 Stat. 2922, 2934 (extending deduction of state and local sales taxes);
Emergency Economic Stabilization Act of 2008, Pub. L. No. 110-343, § 201(a), 122 Stat. 3765,
26

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67.

Congress has not only preserved the deduction over time, but it has repeatedly

recognized the deduction’s importance as a federalism safeguard. When considering reforms to
the tax code in 1963, a House Report stated that it was necessary to retain the SALT deduction to
preserve federalism when “the State and local governments on one hand and the Federal
Government on the other hand tap this same revenue source.” 46 The report concluded that
maintaining the deduction prevented federal interference in state and local tax policy, ensuring that
States could freely structure their tax systems without undue influence from the federal
government. 47
68.

Proposals to repeal the SALT deduction have been repeatedly defeated, due in large

part to constitutional concerns. During the 1980s, for example, a proposal to eliminate the SALT
deduction was defeated after a number of constitutional scholars and elected officials argued that
repealing the SALT deduction was unconstitutional. For example, U.S. Senator Daniel Patrick
Moynihan explained to Congress that repealing the SALT deduction would violate deeply
embedded federalism principles and disrupt the “constitutional balance in some fundamental

3864 (extending deduction of state and local sales taxes); American Recovery and Reinvestment
Act of 2009, Pub. L. No. 111-5, § 1008, 123 Stat. 115, 317 (permitting deduction for state or local
taxes imposed on the purchase of certain motor vehicles); Patient Protection and Affordable Care
Act, Pub. L. No. 111-148, § 9015(b)(2)(A), 124 Stat. 119, 871 (2010) (no material changes to
SALT deduction); Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of
2010, Pub. L. No. 111-312, § 722(a), 124 Stat. 3296, 3316 (extending deduction of state and local
sales taxes); American Taxpayer Relief Act of 2012, Pub. L. No. 112-240, § 205(a), 126 Stat.
2313, 2323 (2013) (same); Tax Increase Prevention Act of 2014, Pub. L. No. 113-295, §§ 105(a),
209(c), 221(a)(12)(D), (26), (95)(B)(ii), 128 Stat. 4010, 4013, 4028, 4038, 4040 & 4051 (extending
deduction of state and local sales taxes, eliminating deduction for motor vehicle taxes, and other
amendments to 26 U.S.C. § 164 not materially changing SALT deduction); Consolidated
Appropriations Act of 2016, Pub. L. No. 114-113, § 106(a), 129 Stat. 2242, 3046 (2015) (repealing
expiration date for deduction of state and local sales taxes).
46

H.R. Rep. No. 88-749, at 48 (1963).

47

See id. at 48-50.
27

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way.” 48 The Governor of New York, Mario M. Cuomo, testified before Congress that the SALT
deduction is a “fundamental constitutional concept,” and that repealing the deduction would
violate the “essential predicate” of the compact between the States and federal government. 49
Governor Cuomo went on to explain that federalism principles would be violated even if the States
benefited from other provisions of the proposed tax reform: “[n]o matter how good a deal you
make,” repealing the SALT deduction would “change the nature of this Republic.” 50 And U.S.
Senator Dave Durenberger, the Chair of the Senate Subcommittee on Intergovernmental Relations,
argued that the SALT deduction was critical to federalism because it “prevent[ed] the national
government from capturing all of the tax base,” “preserve[d] some portion of the base for state and
local revenue sharing,” and “cushion[ed] the harmful tax competition among states by reducing
the effect of fiscal disparities among them.” 51
69.

In response to these and other concerns, Congress rejected efforts to repeal the

SALT deduction for income and property taxes in the 1986 tax reform. 52 And up until the most

48

Tax Reform Proposals—XIX: Hearing Before the S. Finance Comm., 99th Cong. 70
(1985); see also Daniel Patrick Moynihan, Constitutional Dimensions of State and Local Tax
Deductibility, 16 Publius 71 (1986) (arguing that a repeal of the SALT deduction would be
unconstitutional on federalism grounds).
49

The Impact of Repeal of the Deductions for State and Local Taxes: Hearings Before the
Subcomm. on Monetary and Fiscal Policy of the Joint Economic Committee, 99th Cong. 87 (1985).
50

Id.

Others echoed Governor Cuomo’s historical and constitutional argument. See, e.g., Tax
Reform Proposals—XIX, supra note 48, at 14 (statement of Jacob Javits, former U.S. Senator from
New York) (“When the income tax was passed, the understanding was that the Federal
Government had to get its revenue there, leaving the property tax to the States and localities. And
if you deny the deductibility, you destroy this balance at one fell swoop.”); id. at 35 (testimony of
Ed Herschler, Governor of Wyoming) (“The proposed elimination of deductibility threatens to
weaken our federation of states, which is the foundation of our nation.”).
51

See id. at 7.

52

See Liebschutz & Lurie, supra note 4, at 64-70.
28

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recent tax overhaul—through over 60 different tax laws over 150 years—Congress has never
significantly curtailed the scope of the SALT deduction. See 26 U.S.C. § 164 (2012) (SALT
deduction in effect prior to the 2017 Tax Act).
70.

Congress’s consistent respect for the States’ sovereign authority to determine their

own taxation and fiscal policies stands in stark contrast to the passage of the 2017 Tax Act, and
the repeated statements by the President, the Treasury Secretary, and numerous legislators that the
new cap on the SALT deduction was intended “kick” and coerce the Plaintiff States into changing
their public spending policies.
E. The Plaintiff States have come to rely on the existence of a deduction
for all or nearly all state and local taxes.
71.

Based on the historical longevity of the SALT deduction, the States have developed

substantial reliance interests with respect to the deduction, further solidifying the provision of a
deduction for all or a significant portion of state and local taxes as a constitutional requirement.
Cf. National Fed’n of Indep. Bus. v. Sebelius (NFIB), 567 U.S. 519, 580-85 (2012) (weighing
States’ reliance interests when evaluating an assertion of federal power).
72.

At the time the Sixteenth Amendment was ratified in 1913, only a handful of States

had their own income tax regimes. 53 As noted above, Congress included the SALT deduction in
the 1913 Revenue Act in part to avoid interfering with these States’ tax laws.

53

Many colonies imposed faculty taxes, which were a precursor to the modern income tax,
and over a dozen States experimented with their own income tax regimes during the nineteenth
century. At the time the Sixteenth Amendment was ratified, however, many of these regimes had
been allowed to lapse. See Seligman, supra note 2, at 367-428. Wisconsin is widely considered to
have adopted the first modern state income tax regime in 1911. See Ajay K. Mehrotra, Forging
Fiscal Reform: Constitutional Change, Public Policy, and the Creation of Administrative Capacity
in Wisconsin, 1880–1920, 20 J. of Policy Hist. 94, 94-95 (2008).
29

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73.

In the subsequent century, scores of other States adopted their own income tax

regimes, relying on the existence of a deduction for all or a significant portion of SALT. As
previous Congresses have recognized, the SALT deduction removes what would otherwise be a
substantial barrier to States adopting their own income tax laws. Eliminating or drastically
curtailing the deduction now makes those state taxes more expensive because taxpayers will face
concurrent taxes on the same income, making it more difficult for States to levy their own taxes
and generate revenue. 54
74.

In total, some forty-one States now levy broad-based taxes on individual income. 55

Among these States, there is tremendous diversity in the state income tax regimes. For example,
eight States impose a single tax rate on all income, while the remainder vary tax rates by income
bracket. 56 Among the latter group, top marginal rates vary from 3.07% in Pennsylvania to 13.3%
in California. 57 This diversity in tax policy is “[o]ne of federalism’s chief virtues”—the promotion
of “States as laboratories.” Gonzales v. Raich, 545 U.S. 1, 42 (2005) (O’Connor, J., dissenting).
75.

The revenues the States generate from state income taxes are vital. For example,

New York’s income tax alone generates approximately 30% of the State’s annual receipts and

54

See, e.g., H.R. Rep. No. 88-749, at 48-49 (1963) (explaining that the SALT deduction is
a necessary “accommodation” to ensure that the States and federal government can “tap this same
revenue source” and to avoid interference with the States’ tax policy choices).
55

See Tax Policy Center, How Do State and Local Individual Income Taxes Work, at
http://www.taxpolicycenter.org/briefing-book/how-do-state-and-local-individual-income-taxeswork (last visited July 16, 2018) [https://perma.cc/SJ25-PCPZ].
56

See id.

57

See id.
30

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more than 60% of total tax collections. 58 For fiscal year 2017, the state income tax generated
approximately $47.6 billion. 59
76.

The Plaintiff States use this tax revenue to offer essential services and to make vital

public investments. For example, in the 2017 state fiscal year (FY), New York alone spent $26.6
billion on direct funding and grants to schools; $26.1 billion for hospitals and other health services;
$2.9 billion to build and maintain roads and bridges; and $4.2 billion to support police and public
safety services. For the 2015-2016 school year, the last year for which data is available, real
property taxes funded approximately 49% of statewide primary education. 60
77.

Many of the programs funded by the States—and state taxes—provide public

benefits that extend well beyond the Plaintiff States’ borders. For example, in FY 2017, New York
spent $58 million to protect airports, ports, and public waterways; $335 million to maintain its
state parks; over $700 million to support energy conservation; and $4.9 billion to support higher
education.
II.

THE NEW CAP ON THE SALT DEDUCTION WILL SIGNIFICANTLY AND
DISPROPORTIONATELY HARM THE PLAINTIFF STATES AND THEIR RESIDENTS,
IN VIOLATION OF THE U.S. CONSTITUTION.
78.

Prior to the 2017 Tax Act, federal law permitted individuals who itemized their

individual income tax deductions to deduct, with only incidental limitations, all of their: (1) state

58

See id.

59

See New York State Dep’t of Tax and Finance, Fiscal Year Tax Collections: 20162017, at https://www.tax.ny.gov/research/collections/ fy_collections_stat_report/2016_2017_
annual_statistical_report_of_ny_state_tax_collections.htm (last visited July 16, 2018)
[https://perma.cc/YUH9-7T4J].
60

See Annual Financial Report (Form ST-3) for All New York State Public Schools, at
https://stateaid.nysed.gov/st3/st3data.htm (last visited July 16, 2018).
31

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and local real estate taxes, (2) state and local personal property taxes, and (3) either state and local
income taxes or state and local sales taxes. See 26 U.S.C. § 164(a)-(b) (2012).
79.

The 2017 Tax Act eviscerates the SALT deduction for individual taxpayers. 61

Under the 2017 Tax Act, individuals may deduct only up to $10,000 total in (i) state and local real
and personal property taxes, and (ii) either state and local income taxes or state and local sales
taxes. Married taxpayers filing separately may deduct up to $5,000 each. 62 See Pub. L. No. 11597, § 11042. Like many of the provisions of the 2017 Tax Act, the new cap on the SALT deduction
is effective beginning in tax year 2018, and it will expire after 2025 without further action by
Congress. See id.
80.

Although the federal government has previously enacted incidental limitations on

the SALT deduction, the new $10,000 cap on the SALT deduction is unprecedented in several
respects. First, while Congress has previously imposed limitations on the types of state and local
taxes subject to the deduction, Congress has never before limited the deduction of property and
income taxes—taxes that are at the core of the States’ revenue-raising efforts.
81.

Second, the new cap is the first direct limitation on the deduction for state and local

income and property taxes. Congress has previously placed general limits on the amount of
itemized deductions taxpayers could take based on taxpayers’ overall income. But these measures
were often intended to maintain the progressive nature of the income tax and to raise revenue,
rather than to curtail deductions for taxpayers of all incomes, with the goal of injuring a handful

61

The $10,000 cap does not apply to taxes that are “paid or accrued in carrying on a trade
or business.” Pub. L. No. 115-97, § 11042.
62

See H.R. Rep. No. 115-466, at 679 (2017) (Conf. Rep.) (characterizing the $10,000 cap
as an “exception” to the general rule that “State and local income, war profits, and excess profits
taxes are not allowable as a deduction”).
32

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of States. 63 Moreover, those past limitations were not direct caps on the amount of the SALT
deduction a taxpayer could take.
82.

Third, the $10,000 limit on the new cap is particularly low, and it is far exceeded

by the amount that many taxpayers in the Plaintiff States pay in SALT. For example, in 2015, the
most recent year for which tax data is available, the average SALT deduction claimed by the 3.3
million New York taxpayers who itemized their deductions on their federal tax returns was
$21,943. Exhibit (“Ex.”) 1 (Decl. of Lynn Holand) at 3-4.
83.

The cap is not only unprecedented, but it will cause significant injuries to the

Plaintiff States and their sovereign and quasi-sovereign interests—precisely the kind of injuries
and interference the Framers of the Tenth and Sixteenth Amendments intended to preclude.
84.

From a comparative perspective, the new cap on the SALT deduction

disproportionately benefits taxpayers of other States at the expense of the Plaintiff States’
taxpayers. This unequal treatment not only harms millions of taxpayers, but it also hurts the
Plaintiff States themselves.
85.

The cap also hurts the Plaintiff States in absolute terms. Among other things, the

new cap on the SALT deduction is likely to depress home values and increase the cost of state
taxes. This, in turn, would undermine businesses in the Plaintiff States, increase unemployment,
and curtail the Plaintiff States’ income and economic growth.

63

For example, the so-called “Pease provision” reduced the amount of itemized deductions
a taxpayer could take if the taxpayer’s income exceeded a certain threshold. See Omnibus Budget
Reconciliation Act of 1990, Pub. L. No. 101-508, § 11103, 104 Stat. 1388, 1388-406 (codified at
26 U.S.C. § 68(a) (2012)). See also Cong. Research Serv., The PEP and Pease Provisions of the
Federal
Individual
Income
Tax
4
(2006),
at
https://www.everycrsreport.com/reports/RS22464.html (explaining that the Pease provision was
implemented to raise revenue and designed “so that the resultant tax increases were borne by
taxpayers at the upper end of the income spectrum”).
33

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86.

By decreasing state tax revenue and making state taxes more expensive, the new

cap on the SALT deduction will ultimately force the Plaintiff States to choose between maintaining
or cutting their public investments and level of services, and the taxes supporting them. As such,
the new cap on the SALT deduction directly and unfairly interferes with the Plaintiff States’
sovereignty, by depriving them of their authority to determine their own taxation and fiscal policies
without federal interference.
87.

This is by design. Congress enacted the new cap with the purpose of coercing the

Plaintiff States to change their policies. Congress was fully aware that the new cap on the SALT
deduction would disproportionately harm the Plaintiff States, and it enacted the cap with the
expectation that the harmful effects would compel the Plaintiff States to change their policies.
Indeed, prior to the enactment of the 2017 Tax Act, President Trump, Secretary Mnuchin, and
numerous Republican legislators repeatedly identified the Plaintiff States by name and suggested
that the new cap on the SALT deduction was intended to “kick” them and “send a message” that
they needed to alter their taxation and fiscal policies or they were “not going to benefit” from the
2017 Tax Act.
88.

By invading the sovereign policy authority of the Plaintiff States in this way,

Congress has violated the Tenth Amendment and exceeded the federal government’s tax power
under Article I, Section 8 and the Sixteenth Amendment to the United States Constitution. It has
also violated the constitutional guarantee of equal state sovereignty.
A. The new cap on the SALT deduction disproportionately benefits other States
at the expense of the Plaintiff States and their taxpayers.
89.

From a comparative perspective, the new cap on the SALT deduction harms the

Plaintiff States on a variety of different metrics, all of which leave the Plaintiff States and their
taxpayers comparatively worse off.
34

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90.

First, higher percentages of taxpayers in the Plaintiff States will experience a tax

increase because of the 2017 Tax Act as compared to taxpayers in most other States. These
taxpayers will experience a net increase in taxes notwithstanding the Act’s general decrease in tax
rates, because the Plaintiff States have higher percentages of taxpayers who have historically taken
advantage of the SALT deduction and other deductions that were drastically curtailed by the Act,
such as the mortgage interest deduction. While 13% of New York taxpayers, 12% of Maryland
taxpayers, and 11% of New Jersey taxpayers will experience a net increase in federal taxes because
of the 2017 Tax Act, only 5% and 2% of taxpayers in Florida and North Dakota, respectively, will
see their net federal taxes increase. This tax increase is primarily driven by the cap on the SALT
deduction. See Ex. 2 (Decl. of Scott Palladino) at 6-7.
91.

Second, the 2017 Tax Act increases the portion of the federal government’s income

tax revenues paid by taxpayers of the Plaintiff States, even though those taxpayers already pay an
outsize portion of federal income taxes. 64 For example, in 2019, New Yorkers will make up
approximately 6.3% of all U.S. taxpayers. Even without the 2017 Tax Act, New Yorkers would
have paid approximately 9% of all federal income taxes. But because of the 2017 Tax Act, New
Yorker taxpayers will now pay approximately 9.8% of all federal income taxes. 65 The States of
Connecticut, Maryland, and New Jersey will also see their share of federal personal income taxes

64

See Institute on Taxation and Economic Policy, Final GOP-Trump Bill Still Forces
California and New York to Shoulder a Larger Share of Federal Taxes Under Final GOP-Trump
Tax Bill; Texas, Florida, and Other States Will Pay Less (Dec. 17, 2017), at https://itep.org/finalgop-trump-bill-still-forces-california-and-new-york-to-shoulder-a-larger-share-of-federal-taxestexas-florida-and-other-states-will-pay-less/ (last visited July 16, 2018) [https://perma.cc/WY3JZZD5].
65

See id.
35

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significantly increase. 66 By contrast, the 2017 Tax Act will reduce the total federal income taxes
paid by most other States. 67 For example, Florida makes up approximately 7% of all U.S.
taxpayers, and under the law in effect before the 2017 Tax Act, its taxpayers would have paid
approximately 7.2% of federal income taxes. Under the 2017 Tax Act, the share of federal income
taxes paid by Florida taxpayers will decline to approximately 7%. 68 Texas gets an even better deal.
Texas will account for approximately 8.2% of the nation’s taxpayers in 2019, but, under the prior
law, its residents would have paid just approximately 7.6% of federal income taxes. Under the
2017 Tax Act, that number drops to approximately 7.1%. 69
92.

Third, taxpayers in the Plaintiff States get a disproportionately smaller share of the

tax cuts overall relative to taxpayers in other States. Under prior law, taxpayers in each State
contributed some percentage of all taxes paid to the federal government. For example, under the
law in effect prior to the 2017 Tax Act, taxpayers in New York paid 7.3% of all federal taxes. 70
The 2017 Tax Act is a large expenditure of which taxpayers in each State get a percentage. If the
2017 Tax Act treated the States fairly, the expenditure provided to taxpayers in each State—i.e.,
each State’s “share of the tax cut”—would closely reflect the contribution of each State’s taxpayers
under prior law. In fact, the Plaintiff States receive a much smaller expenditure—or share of the
tax cut—relative to their taxpayers’ baseline contributions. For example, New York taxpayers’
share of the tax cut (or their share of the expenditure) was only 5.1%, even though they paid 7.3%

66

See id.

67

See id.

68

See id.

69

See id.

70

The 7.3% represents the percentage of all federal taxes paid by New Yorkers, as distinct
from the 9%, referenced in paragraph 91, supra, which refers to the percentage of all federal
income taxes paid by New Yorkers.
36

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of all federal income taxes under the prior law. In other words, New York taxpayers only received
70.1% of the State’s baseline contribution of federal taxes—i.e., 5.1% of the tax cut divided by
7.3% of all federal tax payments—the lowest such percentage of any State. Similarly, New Jersey
only received 79.4% of its baseline share. By contrast, Alaska received 137%, Texas received
127%, and Florida received 122%. Ex. 2 at 9-11.
93.

Thus, even though some taxpayers in the Plaintiff States will experience a tax cut

because of the 2017 Tax Act, overall, taxpayers in the Plaintiff States get a disproportionately
small share of the recent tax cuts relative to taxpayers in most other States.
94.

Ultimately, the 2017 Tax Act’s inequitable treatment of taxpayers in the Plaintiff

States not only hurts those taxpayers, but it hurts the States themselves. Even if some residents in
the Plaintiff States benefit from the 2017 Tax Act, the Plaintiff States are still worse off in relative
terms because the Act benefits other States to a much greater extent.
B. While residents of the Plaintiff States receive the least benefit from the 2017
Tax Act, they pay for the vast majority of the tax cuts.
95.

Not only do taxpayers in the Plaintiff States receive the smallest benefit from the

2017 Tax Act, but they also bear the burden of paying for the tax cuts in the Act. In other words,
taxpayers in other States get the biggest benefit from the Act at the expense of the Plaintiff States’
taxpayers.
96.

Taxpayers in the Plaintiff States will pay a substantial portion of the increase in

federal taxes generated by the new cap on the SALT deduction. For example, New York taxpayers
will pay an additional $14.3 billion in federal income taxes in tax year 2018 because of the new
cap on the SALT deduction, relative to what they would have paid if the 2017 Tax Act had been
enacted without the new cap. The New York State Department of Taxation and Finance estimates
that, between 2018 and 2025, New Yorkers will pay an additional $121 billion in federal taxes
37

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because of the cap on the SALT deduction, notwithstanding any other provisions of the bill. And
although many New Yorkers will see their federal tax liability decline because of the 2017 Tax
Act’s reduction in tax rates and other changes, more than one million New Yorkers will experience
a net tax increase in 2018, primarily due to the new cap on the SALT deduction. Ex. 2 at 4-6. The
other Plaintiff States will see similar effects. Ex. 3 (Decl. of Ernest Adamo) at 2-3; Ex. 4 (Decl. of
Andrew M. Schaufele) at 2; Ex. 5 (Decl. of Martin Poethke) at 2-5.
97.

The federal Joint Committee on Taxation (JCT) estimates that the 2017 Tax Act

will increase the federal deficit by $1.4 trillion dollars. 71 Most provisions of the bill, including the
changes to the individual tax rates, will increase the federal deficit. To ensure the 2017 Tax Act
would not further enlarge the deficit, Congress needed to include certain revenue-generating items.
Changes to itemized deductions—including the deduction for SALT—are the single largest
revenue-generating mechanism in the Act. 72 Collectively, the most significant changes to itemized
deductions in the 2017 Tax Act—including but not limited to the SALT deduction—will generate
some $668.4 billion in federal tax revenue over eight years. 73 New York alone will pay for about
one-fifth of that figure. And collectively, the Plaintiff States will pay for a substantial portion of
the revenue generated by the 2017 Tax Act.

71

See Joint Committee on Taxation, U.S. Congress, Estimated Budget Effects of the
Conference Agreement for H.R. 1, the “Tax Cuts and Jobs Act”: Fiscal Years 2018-2027, at 8
(Dec. 18, 2017), at https://www.jct.gov/publications.html?func=startdown&id=5053 (last visited
July 16, 2018).
72

According to the JCT, the repeal of personal exemptions will generate $1.2 trillion over
ten years, but that figure is offset by $573 billion in outlays that will be required because of the
expanded child tax credit. See id. at 1.
73

See id. at 2.
38

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C. The new cap on the SALT deduction will depress the real estate market in the
Plaintiff States, further harming the States’ residents and economies.
98.

The new cap on the SALT deduction not only harms the Plaintiff States in

comparative terms, but it will also have direct, negative effects on the Plaintiff States and their
residents by depressing real estate values, depriving homeowners of essential savings and income,
and costing the Plaintiff States hundreds of millions of dollars in revenue, among other things.
99.

Under the law before the 2017 Tax Act, homeowners could fully deduct the cost of

property taxes assessed on their homes. By capping the deductibility of property taxes, those taxes
are no longer fully deductible, which makes homeownership more expensive and decreases the
value of real estate. The New York State Division of the Budget projects that, in aggregate, the
new cap on the SALT deduction will result in a loss of home equity value of approximately $63.1
billion statewide in 2016 dollars. 74 Although the 2017 Tax Act contains a number of other provisions that are likely to depress home prices in New York, the new cap on the SALT deduction is
likely to be the largest contributor to the decline in residential real estate prices. See Ex. 1 at 4-5.
100.

Declining home values will mean that New Yorkers realize a smaller return when

they sell their homes. Even those residents who do not sell their homes will be harmed. For many
homeowners, homes are their most important asset. With declining home values, homeowners lose
income on which they depend to fund retirement, school tuition, and other investments.
Homeowners will also have less income available to spend on goods and services. Based on
standard input-output modeling techniques, the New York State Division of the Budget estimates

74

The 2017 Tax Act overall will depress home equity values in New York by $100.8
billion, with the new cap on the SALT deduction being the primary driver of decreased values. See
Ex. 1 at 3-4.
39

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household spending will decline by approximately $1.26 billion to $3.15 billion because of the
new cap on the SALT deduction. See Ex. 1 at 5-6.
101.

The decline in home equity value and lower household spending will cause direct

injuries to the State. For example, the decline in household spending will mean the State collects
less in sales taxes, because residents will have less income to spend on goods and services. The
State will also collect less in real estate transfer taxes, because depressed home prices will cause
homeowners to delay the sales of their homes. See Ex. 1 at 6.
102.

The decline in household spending will also result in lower sales for businesses in

the State. The decline in household spending, coupled with lower business sales, will ultimately
hurt the growth of the State’s economy. Based on input-output modeling, the New York State
Division of the Budget estimates that New York is likely to lose between 12,500 and 31,300 jobs
due to the new cap on the SALT deduction and its corresponding effects on real estate prices,
household spending, and business sales, among other things. See Ex. 1 at 5-6.
103.

Other States are likely to experience similar harms. For example, the New Jersey

Office of Revenue and Economic Analysis estimates that home values in New Jersey are likely to
decline by an average of 8.5% because of the 2017 Tax Act. This decline will reduce the amount
that the State collects in Realty Transfer Fees—a state tax imposed when a home transfers
ownership. See N.J. Admin Code 46:15-5 et seq. Because of the decline in home values, New
Jersey will also collect less in real property taxes. New Jersey’s Division of Revenue estimates
that, between fiscal years 2019 and 2023, the State will lose $325.9 million in revenue because of
the 2017 Tax Act. See Ex. 5 at 6-8.
104.

Based on models presented to it by the State’s outside advisors, Maryland’s Bureau

of Revenue estimates that the 2017 Tax Act will cause housing prices to grow at a decreased rate,

40

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depriving the state of $13.2 to $25.2 million in real estate tax revenue. Based on the same models,
the Bureau of Revenue Estimates further estimates that the State will lose approximately $7.5
million in 2019 in revenue from the State’s transfer tax on real estate transactions. See Ex. 4 at 34.
105.

These harms are magnified by the fact that many of the Plaintiff States’ residents

purchased their homes years or even decades ago in reliance on the SALT deduction. The 2017
Tax Act’s cap on that deduction will thus impose an immediate and unforeseen additional cost on
such residents. This cost will fall particularly hard on residents whose incomes and assets cannot
accommodate the additional federal tax liability created by the 2017 Tax Act’s severe limitation
on the SALT deduction.
D. Congress purposefully capped the SALT deduction to force the Plaintiff States
to alter their taxation and fiscal policies.
106.

The financial harms that the Plaintiff States and their residents will suffer because

of the new cap on the SALT deduction are not merely an incidental effect of the 2017 Tax Act.
When Congress enacted the cap, President Trump, Secretary Mnuchin, and numerous Republican
legislators made clear their intention was to injure the Plaintiff States and thereby coerce them into
changing their tax policies and cutting the vital public investments that tax revenues support,
including, for example, safety, schools, infrastructure, and transportation.
107.

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

41

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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
108.

Republican legislators and executive-branch officials made clear that one purpose

of capping the SALT deduction was to coerce States that have made the sovereign policy choice
to invest in services and infrastructure to lower their taxes and thereby cut the services that those
taxes support. For example, Secretary Mnuchin declared that altering the SALT deduction was
intended to “send[] a message to the state governments that, perhaps, they should try to get their
budgets in line” and reduce state taxes. 77 While acknowledging that reducing the SALT deduction
would hurt the States that have most relied on taxpayer revenue to make important public
expenditures, Mnuchin argued that such pressure was necessary: “We can’t have the federal
government continue to subsidize the states.” 78
109.

When asked about the impact of a SALT limitation on States such as New York

and New Jersey, President Trump declared that the new cap was designed to force those States to
choose between changing their tax policies or foregoing the tax benefits in the 2017 Tax Act:

75

Ramesh Ponnuru, Red States, Blue States, and Taxes, Nat’l Rev., Nov. 8, 2017, at
http://www.nationalreview.com/corner/453535/red-states-blue-states-and-taxes (last visited July
16, 2018) [https://perma.cc/5TMP-UWNW].
76

Sahil Kapur, ‘Death to Democrats’: How the GOP Tax Bill Whacks Liberal Tenets,
Bloomberg, Dec. 5, 2017, at https://www.bloomberg.com/news/articles/2017-12-05/-death-todemocrats-how-the-gop-tax-bill-whacks-liberal-tenets
(last
visited
July
16,
2018)
[https://perma.cc./H3DM-DC45].
77

Mnuchin Fires Warning Shot to High-Tax States: Get Control of Your Budgets, Fox
Business,
Nov.
9,
2017
(emphasis
added),
at
http://www.foxbusiness.com/
politics/2017/11/09/mnuchin-fires-warning-shot-to-high-tax-states-get-control-yourbudgets.html (last visited July 16, 2018).
78

Mnuchin Backs Key Provision in Trump Tax Plan That Would Hit Democrats Hardest,
(Oct. 12, 2017), at https://www.cnbc.com/2017/10/12/mnuchin-backs-key-provision-in-trumptax-plan-that-would-hit-democrats-hardest.html (last visited July 16, 2018).
42

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“[Y]ou have some really well run states that have very little borrowing. . . . And it’s unfair that a
state that is well-run is really subsidizing states that have been horribly mismanaged. I won’t use
names but we understand the names. . . . And so what we are doing is, we’re showing that. . . .
[I]t’s finally time to say, hey, make sure that your politicians do a good job of running your state.
Otherwise, you are not going to benefit.” 79
110.

Republican legislators echoed Mnuchin’s and Trump’s views. For example,

Senator Rob Portman, a Republican from Ohio, acknowledged that reducing the SALT deduction
would “kick” States with higher levels of public spending, and he hoped that such pressure would
coerce them into lowering state tax rates. 80 House Majority Leader Kevin McCarthy expressly
called on the States to cut their taxes, arguing that the federal government is lowering taxes, and
“‘[w]e challenge our governors as well to do the same.’” 81 Specifically mentioning New York,
California, and New Jersey, Senator Ted Cruz commented that “‘[o]ne hopefully positive result of
this legislation will be that state and local officials will be less eager to jack up taxes . . . .’” 82
111.

Republican legislators openly acknowledged that the 2017 Tax Act would

disproportionately hurt the Plaintiff States. For example, Republican House Member Duncan

79

Transcript: President Trump Vows Largest Tax Cut in History, Hannity (Oct. 11, 2017)
(emphasis added), at http://www.foxnews.com/transcript/2017/10/11/president-trump-vowslargest-tax-cut-in-history-this-country.html (last visited July 16, 2018).
80

Transcript: Moore Back on Campaign Trail, CNN Transcripts (Nov. 28, 2017), at
http://transcripts.cnn.com/TRANSCRIPTS/1711/28/cnr.02.html (last visited July 16, 2018).
81

GOP Leaders to Governors: Lower State Taxes, Wall Street Journal, Oct. 31, 2017, at
https://www.wsj.com/livecoverage/tax-bill-2017/card/1509468748 (last visited July 16, 2018).
82

Kapur, supra note 76.
43

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Hunter stated: “‘California, New Jersey, New York, and other states that have horrible
governments, yes. It’s not as good for those states.’” 83
112.

And House Speaker Paul Ryan explained that he supported cutting the SALT

deduction because Republicans disagree with the Plaintiff States’ tax policy choices. Ryan argued
that the deduction was “‘propping up profligate, big government states.’” 84 And he made clear that
his view rested on a disagreement with the policy choices of the Plaintiff States, in part, because
those States have chosen to invest more in public services. 85
113.

Contrary to these assertions, the Plaintiff States are, in general, net contributors to

the federal government. For example, for federal fiscal year 2016, New York sent $40.9 billion
more in tax payments to Washington than it received in federal spending. For every federal tax
dollar generated in New York, the federal government returned 84 cents to the State. That return

83

Joshua Stewart, Rep. Duncan Hunter said GOP tax bill could cost Californians more
than others, but he still supports it, San Diego Union Tribune, Oct. 30, 2017, at
http://www.sandiegouniontribune.com/news/politics/sd-me-hunter-taxes-20171030-story.html
(last visited July 16, 2018) [https://perma.cc/Z4ET-T3B6].
84

Lindsey McPherson, Brady and Ryan Mulling Big Gamble on Key Tax Deduction, Oct.
16, 2017, at https://www.rollcall.com/news/politics/brady-ryan-mulling-big-gamble-key-taxdeduction (last visited July 16, 2018) [https://perma.cc./3SEN-83Z6].
85

See Mike DeBonis, To Make Their Tax Plan Work, Republicans Eye a Favorite BlueState Break, Wash. Post, Sept. 16, 2017, at https://www.washingtonpost.com/powerpost/to-maketheir-tax-plan-work-republicans-eye-a-favorite-blue-state-break/2017/09/16/c726d506-9a2611e7-b569-3360011663b4_story.html?utm_term=.6d39d5644265 (last visited July 16, 2018)
[https://perma.cc/4KBT-7JFQ].
44

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was substantially less than the $1.18 average return for every tax dollar nationwide. 86 New Jersey
and Connecticut also pay more in federal taxes than their residents receive in federal spending. 87
114.

The Plaintiff States were not only targeted for unequal treatment, but they were also

deprived of a fair opportunity to participate in the lawmaking process to protect their interests.
Congress passed the 2017 Tax Act in a highly rushed and partisan process that left little chance
for legislators from the Plaintiff States to successfully oppose the bill. Because of the
extraordinarily rushed schedule—the bill was passed in less than two months—there was minimal
time for debate, and there were any number of last-minute changes. 88 The bill received no
Democratic votes, and Republicans from the Plaintiff States who voted against the bill faced
retaliation from their Republican colleagues. 89
115.

The Act passed just fifty days after the bill was first proposed in the House. The

legislative process was so rushed that the 2017 Tax Act is riddled with errors and typos that
generated numerous unintended loopholes, which have turned implementation of the bill into a

86

See New York Office of the Comptroller, New York’s Balance of Payments in the
Federal Budget, Federal Fiscal Year 2016, at 3 (2017), at https://www.osc.state.ny.us/
reports/budget/2017/federal-budget-fiscal-year-2016.pdf (last visited July 16, 2018).
87

See id.

88

See Amy B. Wang, Democrats Fume Over ‘Absurd’ GOP Tax Bill Full of Last-Minute
Handwritten Edits, Washington Post, Dec. 2, 2017, at https://www.washingtonpost.com/news/
politics/wp/2017/12/02/democrats-fume-over-absurd-gop-tax-bill-full-of-last-minutehandwritten-edits/?noredirect=on&utm_term=.6450fe45c2f7 (last visited July 16, 2018).
89

See Matthew Rozsa, Why Paul Ryan Snubbed a Republican Congressman’s Fundraiser,
Salon (Dec. 29, 2017), https://www.salon.com/2017/12/29/why-paul-ryan-snubbed-a-republicancongressmans-fundraiser/ (last visited July 16, 2018) [https://perma.cc/Q3EA-Y6ZX]; No Signs of
Punishment for ‘No’ Votes on Tax Overhaul—Yet, Roll Call (Dec. 20, 2017),
https://www.rollcall.com/news/politics/gop-retaliation-tax-overhaul (last visited July 16, 2018)
[https://perma.cc/42W4-GFD5].
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quagmire. Congressional Republicans are already discussing the need for new legislation to correct
their errors in the 2017 Tax Act. 90
116.

By imposing such inequality on the States, and targeting the Plaintiff States in

particular for unfavorable treatment, Congress violated the basic promise of the Constitution: the
States have equal sovereignty under the law.
E. The new cap on the SALT deduction deprives the States of their sovereign
authority to determine their own taxation and fiscal policies.
117.

The Constitution imposes structural constraints on the federal government’s ability

to use its tax power to interfere with the sovereign authority of the States to determine their own
taxation and fiscal policies. See supra at ¶¶ 34-69. 91
118.

By drastically capping the SALT deduction at only $10,000, Congress has exceeded

those constraints.
119.

By design, the new cap on the SALT deduction will make it more difficult for the

Plaintiff States to generate revenue, both politically and economically. As a result, the Plaintiff
States now face the difficult choice of cutting vital public investments or maintaining the necessary
means to generate revenue to finance those investments. By constraining the prerogative of the
90

See, e.g., Eileen A.J. Connelly, GOP’s Tax Reform Law Is Full of Typos, Errors: Experts,
N.Y. Post, Feb. 24, 2018, at https://nypost.com/2018/02/24/gops-tax-reform-law-is-full-of-typoserrors-experts/ (last visited June 12, 2018) [https://perma.cc/LM9Z-728R]; Zoë Henry, How 40
Ambiguities (and Outright Errors) in the New Tax Law Could Cost You Big Money, Inc. (Mar. 13,
2018), https://www.inc.com/zoe-henry/gop-tax-bill-errors-could-impact-your-bottom-line.html
(last visited June 12, 2018); Brian Faler, ‘This Is Not Normal’: Glitches Mar New Tax Law,
Politico, Feb. 24, 2018, at https://www.politico.com/story/2018/02/24/tax-law-glitches-gop423434 (last visited June 12, 2018) [https://perma.cc/6T5H-9MNR].
91

See also Veazie Bank v. Fenno, 75 U.S. 533, 541 (1869) (explaining that there are
“certain virtual limitations, arising from the principles of the Constitution itself” on the taxing
power, and that “[i]t would undoubtedly be an abuse of the power if so exercised as to impair the
separate existence and independent self-government of the States”); Lane County v. State of
Oregon, 74 U.S. 71, 77 (1868) (“There is nothing in the Constitution which contemplates or
authorizes any direct abridgment of [the State’s tax power] by national legislation.”).
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Plaintiff States to make these decisions without federal interference, the new cap on the SALT
deduction impermissibly impinges on the States’ sovereignty in violation of the Tenth and
Sixteenth Amendments to the U.S. Constitution.
120.

While the Supreme Court has long recognized Congress’s power to incentivize

States to adopt federal policy priorities through its Spending Power, see South Dakota v. Dole, 483
U.S. 203, 206-07 (1987), the 2017 Tax Act is not an exercise of such power, and the coercion here
is unprecedented and unlawful. While Congress’s tax power is broad, it cannot be used to
accomplish unconstitutional ends. See United States v. Butler, 297 U.S. 1, 74-75 (1936). As
relevant here, it cannot be used to purposefully treat a handful of States unfavorably with the goal
of coercing those States into choosing between significant financial harm and abandoning their
sovereign authority to determine their own taxation and fiscal policies in favor of federal policy
priorities.
121.

In the months since the enactment of the 2017 Tax Act, the Plaintiff States have

taken, or are considering taking, legislative and other action to combat the most harmful effects of
the new cap on the SALT deduction and to restore their sovereign authority over their own taxation
and fiscal policies.
122.

In response to these efforts, the federal government has signaled that it intends to

take additional action, again targeting the Plaintiff States, to further prevent them from exercising
their sovereign authority. On May 23, 2018, for example, the IRS released a notice that it intends
to issue guidance in direct response to “state efforts to circumvent the new statutory limitation on
state and local tax deductions.” 92 These further efforts make clear that the federal government is
92

Internal Revenue Service, Guidance on Certain Payments Made in Exchange for State
and Local Tax Credits, Notice 2018-54 (May 23, 2018), at https://www.irs.gov/pub/irs-drop/n-1854.pdf; see also Alan Rappeport & Jim Tankersley, I.R.S. Warns States Not to Circumvent State
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not only targeting the Plaintiff States for adverse treatment, but that it intentionally seeks to
interfere with the States’ sovereign policy authority over taxation and fiscal policy.
123.

The new cap on the SALT deduction must be invalidated.

FIRST CAUSE OF ACTION
(Violations of the Tenth Amendment to the United States Constitution)
124.

The States reallege and incorporate by reference the allegations set forth in each of

the preceding paragraphs of this Complaint.
125.

The Tenth Amendment prohibits the federal government from invading the

sovereign tax authority of the States.
126.

The Tenth Amendment also requires the federal government to respect the equal

sovereignty of the sovereign States.
127.

The cap on the SALT deduction has both the purpose and effect of interfering with

the Plaintiff States’ sovereign authority to determine their own fiscal policies.
128.

Without adequate justification, the cap on the SALT deduction also impermissibly

targets for unfavorable treatment those States that have exercised their sovereign authority to adopt
relatively high taxpayer-funded public investments.
129.

The cap on the SALT deduction thereby violates the Tenth Amendment and the

constitutional guarantees of federalism.
130.

Enforcement of the new cap on the SALT deduction would cause significant and

irreparable harm to the Plaintiff States and their residents.

and Local Tax Cap, N.Y. Times, May 23, 2018, https:// nytimes.com/2018/05/23/us/politics/irsstate-and-local-tax-deductions.html (last visited July 16, 2018).
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Case 1:18-cv-06427 Document 1 Filed 07/17/18 Page 49 of 52

SECOND CAUSE OF ACTION
(Violations of the Sixteenth Amendment to the United States Constitution)
131.

The States reallege and incorporate by reference the allegations set forth in each of

the preceding paragraphs of this Complaint.
132.

The federal government’s taxation powers are not unlimited. Under the Sixteenth

Amendment of the United States Constitution, the federal government may not exercise its power
to tax individual incomes without providing a deduction for all or a significant portion of state and
local taxes.
133.

In imposing a $10,000 cap on the deductibility of state and local taxes, Congress

has exceeded its powers under the Sixteenth Amendment.
134.

The cap on the SALT deduction causes substantial and ongoing harm to the Plaintiff

States.
THIRD CAUSE OF ACTION
(Violations of Article I, Section 8 of the United States Constitution)
135.

The States reallege and incorporate by reference the allegations set forth in each of

the preceding paragraphs of this Complaint.
136.

Pursuant to Article I, Section 8 of the United States Constitution, Congress has the

“Power to lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the
common Defence and general Welfare of the United States.”
137.

Congress may not use its tax and spending powers to “exert a ‘power akin to undue

influence’” over the States or coerce the States into adopting policies preferred by the federal
government. NFIB, 567 U.S. at 578 (op. of Roberts, C.J.) (quoting Charles C. Steward Mach. Co.
v. Davis, 301 U.S. 548, 590 (1937)).

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138.

The cap on the SALT deduction will have both the purpose and effect of interfering

with the Plaintiff States’ sovereign authority to determine their own taxation and fiscal policies by
coercing the Plaintiff States into lowering their taxes and cutting the services those taxes support.
139.

The cap on the SALT deduction thereby exceeds Congress’s powers under Article

I, Section 8 of the United States Constitution and violates the constitutional guarantees of
federalism.
140.

The cap on the SALT deduction causes substantial and ongoing harm to the Plaintiff

States.
PRAYER FOR RELIEF
141.

Wherefore, the Plaintiff States Pray that the Court:
a.

Declare that the provision of the 2017 Tax Act imposing a $10,000
cap on the SALT deduction, Pub. L. No. 115-97, § 11042, is
unauthorized by and contrary to the Constitution of the United
States;

b.

Enjoin Defendants from enforcing the new cap on the SALT
deduction;

c.

Award such additional relief as the interests of justice may require.

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Dated: July 17, 2018

STATE OF NEW YORK
BARBARA D. UNDERWOOD
Attorney General
By:. /s/ Caroline A. Olsen
.
Caroline A. Olsen
Assistant Solicitor General
[e-mail]
Steven C. Wu
Deputy Solicitor General
[e-mail]
Justin Wagner
Assistant Attorney General
[e-mail]
Owen T. Conroy
Assistant Attorney General
[e-mail]
Eric R. Haren
Special Counsel
[e-mail]
New York Office of the Attorney General
28 Liberty Street, 23rd Floor
New York, New York 10005
212-416-6184 (tel.)
212-416-8962 (fax)
Attorney for Plaintiff
State of New York

(Counsel list continues on next page.)

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STATE OF CONNECTICUT

STATE OF MARYLAND

GEORGE JEPSEN
Attorney General

BRIAN E. FROSH
Attorney General

By:. /s/ Mark F. Kohler
.
By:. /s/ Sarah W. Rice
.
Mark F. Kohler*
Sarah W. Rice*
Assistant Attorney General
Assistant Attorney General
[e-mail]
[e-mail]
Michael K. Skold*
Maryland Office of the Attorney General
Civil Division
Assistant Attorney General
[e-mail]
200 St. Paul Place, 20th Floor
Connecticut Office of the Attorney General
Baltimore, Maryland 21202
55 Elm Street, P.O. Box 120
410-576-7847 (tel.)
Hartford, Connecticut 06141
410-576-6955 (fax)
860-808-5020 (tel.)
860-808-5347 (fax)
Attorney for Plaintiff
State of Connecticut

Attorney for Plaintiff
State of Maryland

STATE OF NEW JERSEY
GURBIR S. GREWAL
Attorney General
By:. /s/ Jeremy M. Feigenbaum
.
Jeremy M. Feigenbaum*
Assistant Attorney General
[e-mail]
New Jersey Office of the Attorney General
Richard J. Hughes Justice Complex
25 Market Street, 8th Floor, West Wing
Trenton, New Jersey 08625
609-292-4925 (tel.)
609-777-4015 (fax)
Attorney for Plaintiff
State of New Jersey

*Admission pro hac vice pending

52