State Of New York et al v. Mnuchin et al

Filing 57

REPLY MEMORANDUM OF LAW in Support re: 44 CROSS MOTION for Summary Judgment . . Document filed by State Of Connecticut, State Of New York, State of Maryland, State of New Jersey. (Olsen, Caroline)

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

Civil Action No. 1:18-cv-06427 (JPO)

v.
STEVEN MNUCHIN, in his official capacity
as Secretary of the United States Department
of Treasury; the UNITED STATES
DEPARTMENT OF THE TREASURY;
CHARLES P. RETTIG, in his official capacity
as Commissioner of the United States Internal
Revenue Service; the UNITED STATES
INTERNAL REVENUE SERVICE; and the
UNITED STATES OF AMERICA,
Defendants.
REPLY MEMORANDUM OF LAW IN FURTHER SUPPORT OF PLAINTIFFS’
CROSS-MOTION FOR SUMMARY JUDGMENT

TABLE OF CONTENTS
PRELIMINARY STATEMENT .................................................................................................... 1
ARGUMENT .................................................................................................................................. 3
I.

ESTABLISHED CONSTITUTIONAL PRINCIPLES PRECLUDE CONGRESS
FROM EVISCERATING THE SALT DEDUCTION. ....................................................... 3

II. THE CAP ON THE SALT DEDUCTION IS AN IMPERMISSIBLE ATTEMPT
TO INTERFERE WITH THE STATES’ SOVEREIGN POLICY CHOICES BY
IMPOSING UNDUE PENALTIES ON DISFAVORED STATES..................................... 8
A. Defendants Have Not Meaningfully Challenged the Economic Injuries the Plaintiff
States Suffer Due to the Cap on the SALT Deduction. ................................................... 8
B. By Targeting the Plaintiff States for Unfavorable Treatment, the New Cap on the
SALT Deduction Also Violates the Principle of Equal State Sovereignty. ................... 13
CONCLUSION ............................................................................................................................. 19

ii

TABLE OF AUTHORITIES
Page(s)
CASES
Alden v. Maine,
527 U.S. 706 (1999) ............................................................................................................... 3-4
Bailey v. Drexel Furniture Co. (Child Labor Tax Case),
259 U.S. 20 (1922) ...................................................................................................................16
Batalla Vidal v. Nielsen,
291 F. Supp. 3d 260 (E.D.N.Y. 2018) .....................................................................................16
Celotex Corp. v. Catrett,
477 U.S. 317 (1986) .................................................................................................................14
Church of Lukumi Babalu Aye, Inc. v. City of Hialeah,
508 U.S. 520 (1993) ........................................................................................................... 16-17
Davis v. Michigan Dep’t of Treasury,
489 U.S. 803 (1989) ...................................................................................................................7
Dawson v. Steager,
139 S. Ct. 698 (2019) ............................................................................................................. 7-8
Encino Motorcars, LLC v. Navarro,
136 S. Ct. 2117 (2016) ...............................................................................................................5
FERC v. Mississippi,
456 U.S. 742 (1982) ...................................................................................................................4
Florida v. Mellon,
273 U.S. 12 (1927) ...................................................................................................................13
Free Enter. Fund v. Public Co. Accounting Oversight Bd.,
561 U.S. 477 (2010) .............................................................................................................4, 10
Gordon v. Kaleida Health,
299 F.R.D. 380 (W.D.N.Y. 2014)............................................................................................14
Graves v. People of the State of New York ex rel. O’Keefe,
306 U.S. 466 (1939) ...................................................................................................................8
Massachusetts v. United States Dep’t of Health & Human Servs.,
682 F.3d 1 (1st Cir. 2012) .................................................................................................. 15-16

iii

McCreary County v. ACLU of Ky.,
545 U.S. 844 (2005) ...........................................................................................................14, 17
National Fed’n of Indep. Bus. v. Sebelius,
567 U.S. 519 (2012) ................................................................................................... 4-5, 10, 14
Printz v. United States,
521 U.S. 898 (1997) ............................................................................................................... 3-4
Roe v. City of Waterbury,
542 F.3d 31 (2d Cir. 2008).........................................................................................................2
Shelby County v. Holder,
570 U.S. 529 (2013) ...........................................................................................................13, 15
South Carolina v. Baker,
485 U.S. 505 (1988) .................................................................................................. 3-4, 7-8, 13
Sutera v. Schering Corp.,
73 F.3d 13 (2d Cir. 1995)...........................................................................................................9
Trump v. Hawaii,
138 S. Ct. 2392 (2018) .......................................................................................................14, 16
Veazie Bank v. Fenno,
75 U.S. 533 (1869) .....................................................................................................................4
Windsor v. United States,
699 F.3d 169 (2d Cir. 2012)............................................................................................... 15-16
Zhao-Royo v. New York State Educ. Dep’t,
14-cv-0935, 2017 WL 149981 (N.D.N.Y. Jan. 13, 2017) .........................................................2
FEDERAL STATUTES
An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent
Resolution on the Budget for Fiscal Year 2018,
Pub. L. No. 115-97, 131 Stat. 2054 (2017) ................................................................................1
Tax Increase Prevention Act of 2014,
Pub. L. No. 113-295, 128 Stat. 4040 .........................................................................................6
26 U.S.C. § 36B .............................................................................................................................10
42 U.S.C. § 18031(a)(1)-(3) ...........................................................................................................10
52 U.S.C. § 10303(b) .....................................................................................................................15
52 U.S.C. § 10304(a)-(b) ...............................................................................................................15
iv

FEDERAL REGULATIONS
Contributions in Exchange for State or Local Tax Credits, 83 Fed. Reg. 43,563
(proposed Aug. 27, 2018) ........................................................................................................18
LEGISLATIVE MATERIALS
49 Cong. Rec. 1696-98 (Feb. 10, 1910) ...........................................................................................7
SECONDARY SOURCES
Alan J. Auerbach & Laurence J. Kotlikoff, Evaluating Fiscal Policy with a
Dynamic Simulation Model, 77 Am. Econ. Rev. 49, 54 (1987) ..............................................10
Annie McDonough, Comptroller Thomas DiNapoli on the state’s $2.8 billion
budget shortfall, City & State New York (Feb. 6, 2019), at
https://www.cityandstateny.com/articles/policy/policy/comptroller-thomasdinapoli-states-28-billion-budget-shortfall.html ......................................................................12
Decisive Blow at the Income Tax Amendment, Daily Press (Newport News, V.A.),
Mar. 10, 1910 .............................................................................................................................7
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-18-54.pdf .........................................................................18
Jim Tankersley, SALT Limit Is Hitting 11 Million Tax Returns, Audit Finds, N.Y. Times,
Feb. 26, 2019, at https://www.nytimes.com/2019/02/26/us/politics/treasury-salt.html ..........18
John D. Buenker, The Ratification of the Federal Income Tax Amendment,
1 Cato J. 183 (1981) ...................................................................................................................7
Press Release, U.S. Dep’t of Treasury, Treasury Secretary Mnuchin Statement on
Clarification for Business Taxpayers: Contributions Under State and Local
Tax Credit Programs Generally Deductible as Business Expenses (Sept. 5,
2018), at https://home.treasury.gov/news/ press-releases/sm472 ............................................18
Root for Adoption of Tax Amendment, N.Y. Times, Mar. 1, 1910 ..................................................7
The Elliman Report, Quarterly Survey of Manhattan Co-op & Condo Sales
(Douglas Elliman Real Estate, Jan. 2019), at
https://www.millersamuel.com/files/2019/01/Manhattan-4Q_2018.pdf .................................12
The Elliman Report, Quarterly Survey of Westchester County Residential Sales
(Douglass Elliman Real Estate, Jan. 2019), at
https://www.millersamuel.com/files/2019/01/Westchester-4Q_2018.pdf...............................12

v

PRELIMINARY STATEMENT
The States of New York, Connecticut, Maryland, and New Jersey (the “Plaintiff States”)
submit this reply brief in further support of their motion for summary judgment. As the Plaintiff
States established in their opening brief, Congress violated fundamental principles of federalism
when it enacted a $10,000 cap on the federal tax deduction for state and local taxes (“SALT”).
See An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution
on the Budget for Fiscal Year 2018 (the “2017 Tax Act” or “Act”), Pub. L. No. 115-97, § 11042,
131 Stat. 2054 (2017) (H.R. 1). The new cap on the SALT deduction disregards fundamental
constitutional restraints that prevent the federal government 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. Both the purpose and the effect of the new
cap is to inflict economic harm on the Plaintiff States, with the intent of coercing them into
lowering their tax rates and cutting public investments. Although Congress’s tax power is broad,
it does not justify such an egregious interference with the sovereign authority of the States to
determine their own taxation and fiscal policies.
As the Plaintiff States have previously explained, there are no threshold barriers to the
Court’s resolution of the Plaintiff States’ claims. See Mem. of Law in Opp’n to Defendants’ Mot.
to Dismiss and in Supp. of Plaintiffs’ Cross-Mot. for Summ. J. (“States’ Br.”) at 5-14. Moreover,
defendants have failed to demonstrate any disputed issue of fact precluding summary judgment.
Defendants have not challenged the veracity any of the 69 statements of material fact underlying
the Plaintiff States’ constitutional claims—including the economic analyses establishing the
substantial harms the Plaintiff States are suffering because of the new cap, which include billions

1

of dollars of lost tax revenue and lower economic growth. See Government’s Resp. to the States’
Local Rule 56.1 Statement (“Defs.’ 56.1 Resp.”). 1
As with their opening brief, defendants primarily object to the novelty of the Plaintiff
States’ constitutional theory. But as the Plaintiff States have explained, the constitutional necessity
of the SALT deduction is firmly grounded in the structure of the Constitution, more than 150
years of precedent, and the substantial reliance interests that have developed around Congress’s
consistent historical practice of providing a SALT deduction for nearly all state and local income
and property taxes.
This Court should grant the Plaintiff States’ motion for summary judgment and deny
defendants’ motion to dismiss.

1

In lieu of disputing the facts, Defendants copy and paste into each of their Rule 56.1
responses the same boilerplate assertion that the Plaintiff States’ factual statements are not
material. But each fact in Plaintiffs’ Rule 56.1 statement is material because it could “affect the
outcome of the suit under the governing law.” Roe v. City of Waterbury, 542 F.3d 31, 35 (2d Cir.
2008) (quotation marks omitted). For example, the undisputed facts regarding the history of the
federal tax power make clear that the new SALT deduction cap is an unprecedented expansion of
federal power vis-à-vis the States, which is a core concept underlying the Plaintiff States’ claims.
See infra at 3-8. Defendants do not offer any basis for their conclusory assertion that these facts
do not affect the outcome of this action. The Plaintiff States’ statements should therefore be
deemed admitted. See Zhao-Royo v. New York State Educ. Dep’t, 14-cv-0935, 2017 WL 149981,
at *2 n.2 (N.D.N.Y. Jan. 13, 2017) (“[W]here a non-movant has merely objected to the materiality
of a fact, and the Court has concluded that the fact is material, the fact will be deemed admitted.”).
Defendants also assert several baseless admissibility objections, which are addressed below.
2

ARGUMENT
I.

ESTABLISHED CONSTITUTIONAL PRINCIPLES PRECLUDE
CONGRESS FROM EVISCERATING THE SALT DEDUCTION.
As the Plaintiff States have explained (States’ Br. at 15-18), basic principles of federalism

require the federal government to respect the sovereign authority of the States to determine their
own taxation and fiscal policies. The new cap on the SALT deduction plainly violates this
constitutional requirement by eviscerating a deduction that is essential to ensuring that the States
are neither precluded from raising revenue from traditional sources, nor compelled to adopt the
federal government’s preferred taxation and fiscal policies.
Defendants continue to insist that the court should reject the Plaintiff States’ claims
because they are novel. See Reply Mem. of Law in Further Supp. of the Government’s Mot. to
Dismiss and in Opp’n to the States’ Cross-Mot. for Summ. J. (“Defs.’ Reply Br.”) at 11, 15. But
the claims are novel only because Congress’s action here was so unprecedented. In over 150
years, Congress has never before encroached on the States’ tax sovereignty in this manner by
capping the SALT deduction.
While the violation itself may be new, there are three basic principles that underlie the
Plaintiff States’ claims, each of which is firmly rooted in constitutional doctrine:
First, to police the limits of congressional power vis-à-vis the States, the Supreme Court
has repeatedly looked to “the structure of the Constitution” to “discern among its ‘essential
postulates.’” Printz v. United States, 521 U.S. 898, 918 (1997) (quoting Principality of Monaco
v. Mississippi, 292 U.S. 313, 322 (1934)) (brackets omitted). 2 In the context of Congress’s tax

2

See also, e.g., Alden v. Maine, 527 U.S. 706, 728 (1999) (“These holdings reflect a settled
doctrinal understanding, consistent with the views of the leading advocates of the Constitution’s
ratification, that sovereign immunity derives not from the Eleventh Amendment but from the
structure of the original Constitution itself.”); South Carolina v. Baker, 485 U.S. 505, 518 n.11
(1988) (doctrine of intergovernmental tax immunity “arises from the constitutional structure and
3

power, the Court has recognized that our system of dual federalism precludes the federal
government from “exert[ing] a ‘power akin to undue influence’” over the States. National Fed’n
of Indep. Bus. v. Sebelius (NFIB), 567 U.S. 519, 577 (2012) (quoting Charles C. Steward Mach.
Co. v. Davis, 301 U.S. 548, 590 (1937)); see also Veazie Bank v. Fenno, 75 U.S. 533, 541 (1869)
(Congress’s tax power is subject to “certain virtual limitations” and cannot be used “to impair the
separate existence and independent self-government of the States”). In violation of these bedrock
principles, the new cap on the SALT deduction directly infringes on the sovereign authority of
the States to determine their own taxation and fiscal policies by imposing severe burdens on
relatively high-tax States to coerce them into lowering their taxes and reducing their public
investments. See FERC v. Mississippi, 456 U.S. 742, 761 (1982) (“[T]he power to make decisions
and to set policy is what gives the State its sovereign nature.”).
Second, in federalism cases, the Supreme Court has repeatedly emphasized the significance
of historical practice. See, e.g., Printz, 521 U.S. at 905-18; Alden v. Maine, 527 U.S. 706, 715-28
(1999). In Printz, for example, the Supreme Court invalidated the Brady Act’s commandeering
requirement, which required state officials to administer the federal background-check system for
gun purchasers, based, in part, on the “unprecedented” nature of the requirement. 521 U.S. at 905.
As the Supreme Court stated, “if . . . earlier Congresses avoided use of this highly attractive
power, we would have reason to believe that the power was thought not to exist.” Id.; see also
Free Enter. Fund v. Public Co. Accounting Oversight Bd., 561 U.S. 477, 505 (2010) (“Perhaps
the most telling indication of [a] severe constitutional problem . . . is the lack of historical

a concern for protecting state sovereignty”). See generally Baker, 485 U.S. at 511 n.5 (“We use
‘the Tenth Amendment’ to encompass any implied constitutional limitation on Congress’
authority to regulate state activities, whether grounded in the Tenth Amendment itself or in
principles of federalism derived generally from the Constitution.”).
4

precedent.” (quotation marks omitted)). The new cap on the SALT deduction represents a gross
departure from the settled historical practice. In over 150 years, Congress has never before
imposed a direct and severe cap on the deductibility of state and local taxes, much less a cap with
a coercive intent. This history strongly suggests that Congress lacks the power to impose the 2017
Tax Act’s $10,000 cap.
Third, in a variety of contexts, constitutional and otherwise, the Supreme Court subjects
to greater scrutiny federal action that upsets long-standing reliance interests. See, e.g., NFIB, 567
U.S. at 582-85 (federalism); Encino Motorcars, LLC v. Navarro, 136 S. Ct. 2117, 2126 (2016)
(administrative action). Over the past century, the Plaintiff States have developed significant
reliance interests, having structured their income tax regimes around the existence of a deduction
for all or nearly all state and local income and property taxes. See States’ Br. at 24; Compl.
¶¶ 71-77. The new cap on the SALT deduction upends these settled expectations, and is therefore
constitutionally suspect.
Taken together, these basic principles make clear that Congress transgressed the
constitutional limitations on its power when it drastically curtailed the SALT deduction.
Defendants assert (Defs.’ Reply Br. at 10-11) that the Plaintiff States have abandoned their
reliance on the Sixteenth Amendment, but they continue to misunderstand the nature of our
claims. As the Plaintiff States have repeatedly explained (States’ Br. at 15-20; Compl. ¶¶ 45-65),
the Sixteenth Amendment supports the constitutional necessity of the SALT deduction. The
history of the amendment’s ratification demonstrates that the States viewed the amendment as a
compact, in which the States granted the federal government the power to impose an unapportioned
income tax on the condition that all of the other limitations on the federal tax power would remain
unaltered. One of the recognized limitations on the federal government’s tax power at the time of

5

the amendment’s enactment was that Congress could not exercise its income tax power without
providing a deduction for all or nearly all state and local taxes. That understanding dates back to
the War of 1812, when Congress first considered enacting an income tax with a deduction for all
state and local taxes. And it was enshrined in Congress’s constitutional practice when, in the first
income tax enacted in 1861, Congress included a broad deduction for state and local taxes. And
a broad SALT deduction has been included in every income tax statute until the 2017 Tax Act.
See States’ Br. at 14-22. Thus, far from abandoning the Sixteenth Amendment, the Plaintiff States
have expressly relied on it as an important aspect of their broader structural arguments.
Defendants also misinterpret the history of the SALT deduction when they argue (Defs.’
Reply Br. at 12) that the incidental limitations that have been placed on the deduction over the
years suggest that a deduction is not constitutionally required. As the Plaintiff States have
previously explained (States’ Br. at 21-22), the past limitations on the deduction were of a
different degree and kind—they either were not direct limitations on the SALT deduction, or they
carved out from the deduction incidental taxes. By contrast, income and property taxes are not
incidental. The States have imposed income and property taxes since before the formation of the
union, and the revenue from those taxes remains an essential source of public sector revenue. See
id. at 22-23; Compl. ¶¶ 39-42. Past limitations on the deductibility of other categories of taxes—
such as the elimination of the deduction for state motor vehicle taxes 3—simply did not infringe
on the States’ sovereignty in the same way as a direct cap on the deductibility of income and
property taxes. The main takeaway from the incidental limitations that Congress has imposed on
the SALT deduction is not that the deduction is not required, but rather that, for over 150 years,

3

See Tax Increase Prevention Act of 2014, Pub. L. No. 113-295, § 221, 128 Stat. 4010,
4040 (eliminating deduction for state motor vehicle taxes).
6

51 different Congresses have felt compelled to provide a deduction for all or nearly all state and
local income and property taxes—until now. 4
Defendants devote a significant portion of their reply brief to the doctrine of intergovernmental tax immunity (Defs.’ Reply Br. at 13-15), which prohibits the States and the federal
government from imposing direct or discriminatory taxes on each other. See Davis v. Michigan
Dep’t of Treasury, 489 U.S. 803, 811 (1989); Dawson v. Steager, 139 S. Ct. 698, 703 (2019). The
Plaintiff States agree with defendants that the doctrine is not directly relevant here, because the
Plaintiff States do not challenge the constitutionality of the new SALT deduction cap under that
doctrine. 5 Nonetheless, the doctrine further highlights the unconstitutionality of the new cap. Like
the federalism principles on which the Plaintiff States rely here, the doctrine of intergovernmental
tax immunity does not arise from a particular phrase of the constitution, but “from the
constitutional structure and a concern for respecting state sovereignty.” South Carolina v. Baker,
4

As the Plaintiff States have already explained (States’ Br. at 21-22), neither the Pease
Provision nor the Alternative Minimum Tax were direct limitations on the SALT deduction, and
neither undercuts Congress’s consistent historical practice of providing a deduction for nearly all
state and local income and property taxes.
5

The fact that the framers of the Sixteenth Amendment discussed the doctrine during the
ratification debates does not, as defendants contend (Defs.’ Reply Br. at 13-14), establish that the
States were not concerned with the deductibility of SALT. That doctrine was just one issue
highlighting an overarching constitutional concern that the Sixteenth Amendment would permit
the federal tax power to intrude on state sovereignty. See, e.g., John D. Buenker, The Ratification
of the Federal Income Tax Amendment, 1 Cato J. 183, 204 (1981) (Exhibit to the Declaration of
Owen T. Conroy (“Pls.’ Ex.”) 14) (describing the States’ general “concern . . . that a federal
income tax would not seriously impair state sovereignty”); Decisive Blow at the Income Tax
Amendment, Daily Press (Newport News, V.A.), Mar. 10, 1910, at 4 (Pls.’ Ex. 18) (Virginia
newspaper noting general concern of States “surrendering unnecessarily to the central
government any important right now reserved to the States”); 49 Cong. Rec. 1696-98 (Feb. 10,
1910) (Pls.’ Ex. 19) (U.S. Senator William Borah stating “there must always be subtracted from
[the federal tax] power the right of the different sovereignties to perform their functions as such”);
Root for Adoption of Tax Amendment, N.Y. Times, Mar. 1, 1910, at 4 (Pls.’ Ex. 20) (U.S. Senator
Elihu Root affirming general principle that the Constitution requires separate federal and state tax
sovereigns to operate “unembarrassed and unimpaired by any action of the other”).
7

485 U.S. 505, 518 n.11 (1988). The Supreme Court has construed the doctrine to provide
meaningful protections for the States’ sovereign authority to determine their own taxation and
fiscal policies. At its core, the doctrine recognizes that, when the federal and state government’s
tax powers are concurrent, “neither through its power to tax can be allowed to cripple the
operations of the other.” Graves v. People of the State of New York ex rel. O’Keefe, 306 U.S. 466,
488 (1939) (Frankfurter, J., concurring.). Although the scope of intergovernmental tax immunity
has narrowed over the years, it continues to bar “discriminatory taxes.” Dawson, 139 S. Ct. at
703. This prohibition reflects the understanding that neither the States, nor the federal
government, may use its tax power to target the other for disfavored treatment. As the Plaintiff
States have repeatedly explained, however, that is exactly what the federal government has done
by capping the SALT deduction. See States’ Br. at 22-26; Compl. ¶¶ 78-122.
II.

THE CAP ON THE SALT DEDUCTION IS AN IMPERMISSIBLE
ATTEMPT TO INTERFERE WITH THE STATES’ SOVEREIGN POLICY
CHOICES BY IMPOSING UNDUE PENALTIES ON DISFAVORED
STATES.
A.

Defendants Have Not Meaningfully Challenged the Economic Injuries the
Plaintiff States Suffer Due to the Cap on the SALT Deduction.

As the Plaintiff States have explained (States’ Br. at 22-26; Compl. ¶¶ 71-77), the new
cap on the SALT deduction has both the purpose and effect of injuring the Plaintiff States and
their residents. Because of the cap, taxpayers in the Plaintiff States will pay an additional $121
billion in federal taxes between 2018 and 2025. The new cap also makes it more expensive to
own a home, which will ultimately depress home prices and deprive the Plaintiff States of tens of
millions of dollars in revenue from real estate transfer taxes. By making state taxes more
expensive overall, the new cap will ultimately make it more difficult for the Plaintiff States to
raise revenue through taxes, and to decide how to invest in public safety, infrastructure, and
8

schools, among other things. Congress enacted the SALT deduction cap knowing that the Plaintiff
States would suffer these harms, with the expectation that the Plaintiff States would be compelled
to alter their taxation and fiscal policies in accordance with Congress’s preferences.
Defendants do not challenge the truth any of the States’ testimony regarding economic
harm. See Defs.’ 56.1 Resp. at 19-27. 6 In the face of detailed declarations (Compl., Exhibits (Exs.)
1-5) submitted from tax and economic experts within the relevant state agencies detailing the
economic consequences of the new SALT deduction cap, defendants have submitted nothing.
Instead, they assert (Defs.’ Reply Br. at 15-16) that the Plaintiff States have applied the wrong
framework to assess the economic harms of the new cap—i.e., the Plaintiff States have chosen to
compare the effects of the 2017 Tax Act to a world in which the Act was enacted without the
SALT deduction cap. According to defendants, the correct comparison is “between the 2017 Tax
Act as enacted and the state of the Internal Revenue Code beforehand.” Id. at 16. Defendants’
arguments fail for several reasons.
As a matter of basic statutory construction, comparing the 2017 Tax Act with and without
the SALT deduction is a valid framework for assessing the economic consequences of the SALT
deduction cap, because it isolates the economic effects of the cap without considering extraneous
provisions of the Act or other provisions of the federal tax code. A court considering the
constitutionality of a particular statutory provision necessarily looks to that provision’s effect—

6

Defendants object only to the materiality and admissibility of Plaintiffs’ declarations,
but these objections are meritless. The evidence of economic harm is supported by sworn
declarations of representatives of the state agencies that have direct knowledge of the harms
described therein. And defendants do not identify any part of the testimony that they believe to
be factually inaccurate or which requires further expert or fact discovery. See Sutera v. Schering
Corp., 73 F.3d 13, 18 (2d Cir. 1995) (party opposing a motion for summary judgment can defeat
the motion by identifying information that is “essential to his opposition” that he has not had the
opportunity to discover (quotation marks omitted)).
9

not the effects of the entire enactment that contained it. That principle underlies severability
analysis; courts consider the validity of a challenged provision on its own terms before turning to
the question of remedy—i.e., whether the offensive provision is separable. 7 See, e.g., Free Enter.
Fund, 561 U.S. at 508-09 (considering the constitutionality of the structure of the Public Company
Accounting Oversight Board without considering the constitutionality of the entire SarbanesOxley Act). And it is precisely the framework the Supreme Court has used when it has considered
whether the burdens imposed on the States by a particular provision of a statute are unduly
coercive. For example, in NFIB, when determining whether the Affordable Care Act (ACA)
improperly coerced the States into expanding their Medicaid programs, the Supreme Court
considered only the financial costs to the States of refusing to expand their Medicaid programs
without asking whether other provisions of the ACA—such as the financial incentives for setting
up health care exchanges, 42 U.S.C. § 18031(a)(1)-(3), or health insurance premium subsidies,
26 U.S.C. § 36B—offset the financial burdens on the States. See 567 U.S. at 575-87. 8 Defendants’
alternative framework—comparing the 2017 Tax Act to the prior tax code—is not only at odds
with the Court’s approach in NFIB, but it also fails to capture the ways in which individual
taxpayers will change their behavior in response to the 2017 Tax Act. 9

7

For this reason, defendants’ contention (Defs.’ Reply Br. at 16 & n.10) that Congress
would not have enacted the 2017 Tax Act without the SALT deduction cap does not bear on the
constitutionality of that provision, but only on whether the court should invalidate the entire Act
or just the cap if it concludes that the cap is unconstitutional.
8

The Plaintiff States believe, consistent with the basic law of severability, that the SALT
deduction cap is severable from the 2017 Tax Act. See, e.g., Free Enter. Fund, 561 U.S. at 50809. Given the complexity and scope of the 2017 Tax Act, however, we respectfully submit that
the court should permit the parties to engage in separate briefing on the question of severability
if this Court determines that the new cap on the SALT deduction is unconstitutional.
9

See, e.g., Alan J. Auerbach & Laurence J. Kotlikoff, Evaluating Fiscal Policy with a
Dynamic Simulation Model, 77 Am. Econ. Rev. 49, 54 (1987) (in tax policy context, “[d]ynamic
10

In any event, defendants are simply wrong when they assert that the Plaintiff States’
“entire economic analysis” compares the 2017 Tax Act with and without the SALT deduction
cap. Defs.’ Reply Br. at 15. Only one category of analyses relies on that comparison. Those
analyses show that the Plaintiff States will pay an additional $121 billion in federal income taxes
between 2018 and 2025 because of the cap on the SALT deduction, relative to what taxpayers
would have paid if the 2017 Tax Act had been enacted without the SALT deduction. As explained
above, that approach was valid and highlights in stark terms one of several burdens the new SALT
deduction cap imposes on the Plaintiff States.
The Plaintiff States have also offered a plethora of other analyses that compare the
economic effects of the 2017 Tax Act to a world under the prior tax code—i.e., defendants’
preferred framework. For example, the models predicting a significant decline in New York’s real
estate market use the prior tax law as a baseline for comparison. See Declaration of Lynn Holland
(ECF No. 1-1) (“Holland Decl.”) ¶ 10. That analysis shows that the SALT deduction cap will
depress real estate values and home sales, and that the resulting decline in household wealth could
result in the loss of between 12,500 and 31,300 jobs and depress New York’s economy generally.
See id. ¶¶ 16-21. The comparative analyses cited in the complaint likewise show that the Plaintiff
States are harmed by the 2017 Tax Act relative to a world under prior tax law. Among other
things, these analyses show that the 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. The analyses also show that, relative to taxpayers in other

simulation models can resolve a number of important issues that cannot be adequately considered
in static or steady-state analyses”).
11

States, taxpayers in the Plaintiff States get a disproportionately smaller share of the tax cuts in the
2017 Tax Act overall. See Compl. ¶¶ 89-92; Declaration of Scott Palladino (ECF No. 1-2) at 6-12.
If there were any question about whether the Plaintiff States will be economically harmed
by the SALT deduction cap, recent developments dispel any doubt. As predicted by the New York
Division of the Budget (Holland Decl.), home sales in Westchester County, Long Island, and
Manhattan are down, and growth in home sale prices has either slowed or declined in several
counties. 10 Moreover, according to New York State Comptroller Thomas DiNapoli, New York is
now facing a $2.3 billion budget deficit, in no small part because the SALT deduction cap has
caused high-income taxpayers to relocate to other States to avoid the increased tax burden in New
York. 11 It is thus beside the point (Defs.’ Reply Br. at 16-17) that some residents in the Plaintiff
States may have lower federal tax liability. Regardless of the financial consequences of the Act
for individual taxpayers, the 2017 Tax Act is already inflicting substantial financial burdens on
the Plaintiff States, which makes it more difficult for the Plaintiff States to raise revenue through
taxation. 12

10

See, e.g., The Elliman Report, Quarterly Survey of Manhattan Co-op & Condo Sales
(Douglas Elliman Real Estate, Jan. 2019), https://www.millersamuel.com/files/2019/01/
Manhattan-4Q_2018.pdf; The Elliman Report, Quarterly Survey of Westchester County
Residential Sales (Douglass Elliman Real Estate, Jan. 2019), https://www.millersamuel.com/
files/2019/01/Westchester-4Q_2018.pdf.
11

See, e.g., Annie McDonough, Comptroller Thomas DiNapoli on the state’s $2.8 billion
budget shortfall, City & State New York (Feb. 6, 2019), https://www.cityandstateny
.com/articles/policy/policy/comptroller-thomas-dinapoli-states-28-billion-budget-shortfall.html
(quoting New York Comptroller Thomas DiNapoli) (“[T]he most significant change we’ve seen
relates to the impact of SALT.”).
12

The fact that the Plaintiff States are already suffering harm also rebuts defendants’
contention that the Plaintiff States’ injuries are too speculative to establish standing. See Mem. of
Law in Supp. of the Government’s Mot. to Dismiss at 13-14; Defs.’ Reply Br. at 22.
12

Defendants also argue (Defs.’ Reply Br. at 17) that the burdens imposed on the States by
the 2017 Tax Act are not severe enough to constitute “impermissible coercion.” As previously
explained (States’ Br. at 27-29), however, the federal government’s actions here go well beyond
the mild forms of encouragement of state policy that the Supreme Court has upheld previously.
Not only are the economic burdens—amounting to billions of dollars in additional tax payments
to the federal government—akin to the financial harms that the Supreme Court found to be
coercive in NFIB, but the harms here were also enacted with the purpose of interfering with the
Plaintiff States’ sovereign policy control over taxation and fiscal policy. 13
B.

By Targeting the Plaintiff States for Unfavorable Treatment, the New Cap
on the SALT Deduction Also Violates the Principle of Equal State
Sovereignty.

As the Plaintiff States have explained (States’ Br. at 9, 29-33), there is a “‘fundamental
principle of equal sovereignty’ among the States,” which requires courts to review legislation
with exacting scrutiny when the federal government intentionally discriminates among the States.
See Shelby County v. Holder, 570 U.S. 529, 544 (2013) (quoting Northwest Austin Mun. Util.
Dist. No. One v. Holder, 557 U.S. 193, 203 (2009)). Defendants have violated this principle by
targeting the Plaintiff States to pay for tax cuts that primarily benefit the rest of the country, with
the expectation that the unequal burdens imposed on the Plaintiff States will coerce them into
lowering taxes and cutting public investments.

13

The cases on which defendants rely (Defs.’ Reply Br. at 18) are distinguishable, because
it was evident in both cases that the challenged law would have a minimal impact on the Plaintiff
States. See Baker, 485 U.S. at 529 (Rehnquist, C.J., concurring) (noting that a Special Master had
already found that the tax law at issue would have only a minimal impact on the States); Florida
v. Mellon, 273 U.S. 12, 18 (1927) (finding that there was “no substance in the contention that the
state has sustained, or is immediately in danger of sustaining, any direct injury as the result of the
enforcement of the action in question”).
13

The Plaintiff States have offered ample evidence establishing that Congress intentionally
targeted the Plaintiff States for disparate and unequal treatment—including (i) comparative
economic analyses, (ii) post-enactment regulatory developments, and (iii) statements from the
public officials responsible for enacting and enforcing the SALT deduction cap. See States’ Br.
at 29-33. Defendants do not attempt to meaningfully refute the evidence in either of the first two
categories.
With respect to the third category, defendants also do not challenge the veracity of any of
the statements from public officials, nor do they suggest that the lawmakers did not, in fact, intend
to punish the Plaintiff States when they enacted the SALT deduction cap. Instead, defendants
argue that this Court should turn a blind eye to this evidence because Congress was acting
pursuant to its Article I power, and thus Congress’s motive was irrelevant. Defendants are again
mistaken. 14 Although Congress’s tax power is broad, Article I is not the only constitutional
provision at play. “[A]ny tax must still comply with other requirements in the Constitution.”
NFIB, 567 U.S. at 570. It is thus no defense to say that the new cap on the SALT deduction is
within Congress’s tax powers if the cap also violates fundamental principles of federalism,
including the principle of equal state sovereignty.
14

Defendants’ argument (Defs.’ 56.1 Resp. ¶¶ 34-46) that the statements of public
officials are inadmissible hearsay is meritless. There is no requirement “that the materials be
presented in an admissible form on summary judgment.” Gordon v. Kaleida Health, 299 F.R.D.
380, 393 (W.D.N.Y. 2014). Federal Rule of Civil Procedure 56 requires only that “the evidence
must be capable of presentation in admissible form at the time of trial.” Id.; cf. Celotex Corp. v.
Catrett, 477 U.S. 317, 324 (1986) (“We do not mean that the nonmoving party must produce
evidence in a form that would be admissible at trial in order to avoid summary judgment.”). It is
sufficient that the Plaintiff States could call the relevant officials for their direct testimony at trial.
In any event, courts routinely consider public statements similar to those at issue here. See, e.g.,
Trump v. Hawaii, 138 S. Ct. 2392, 2417-18 (2018) (relying on publicly reported statements of
President Trump); McCreary County v. ACLU of Ky., 545 U.S. 844, 851 (2005) (publicly reported
statements of local officials). Given that defendants have not challenged the accuracy of the
quoted statements, there is no prejudice to defendants if the court considers the evidence.
14

Moreover, Congress’s motives are relevant in this case. As the Supreme Court has
explained, when the federal government “intru[des] into sensitive areas of state and local
policymaking,” courts must conduct a searching inquiry of the legislative rationale. Shelby
County, 570 U.S. at 544 (quotation marks omitted). In Shelby County, that inquiry took the form
of careful scrutiny of voter turnout and other statistics to determine whether the rationale for
subjecting certain States to the Voting Rights Act’s preclearance requirement was still valid. See
id. at 548-53. In federalism cases, courts have probed deeply into Congress’s motives for enacting
legislation, recognizing that an intrusion into the sovereign sphere of the States necessitates
“closer than usual scrutiny” of the statutory “justifications,” and that federalism concerns
“diminish somewhat the deference ordinarily accorded” to Congress.” Massachusetts v. United
States Dep’t of Health & Human Servs., 682 F.3d 1, 11-12 (1st Cir. 2012); see also Windsor v.
United States, 699 F.3d 169, 186 (2d Cir. 2012), aff’d, 570 U.S. 744 (2013) (court required to
take a “cold eye” to the justifications for Defense of Marriage Act, which represented an
“unprecedented intrusion into an area of traditional state regulation” (quotation marks omitted)) .
Here, as in those cases, Congress’s intrusion into the core of the States’ sovereign tax
authority requires this Court to take a hard look at the motives underlying the new cap on the
SALT deduction. 15 See States’ Br. at 34-35. The public statements the Plaintiff States cite in their

15

Defendants’ attempts (Defs.’ Reply Br. at 21) to distinguish Shelby County are
unavailing. Here, as in Shelby County, Congress’s actions disparately affect the Plaintiff States
while also constituting an “extraordinary” intervention into the Plaintiff States’ sovereign affairs.
570 U.S. at 544-45 (quotation marks omitted). The preclearance requirement at issue in Shelby
County applied only to certain States based on a formula without identifying any particular State
by name. See 52 U.S.C. §§ 10303(b) (formula), 10304(a)-(b) (preclearance requirement). Here,
by setting the SALT deduction cap below the average cost of state and local taxes in the Plaintiff
States, Congress has effectively employed a formula just as it did in Shelby County. In any event,
Shelby County is far from the only precedent making clear that the a court should apply a more
15

complaint provide substantial evidence that, despite the facial neutrality of the 2017 Tax Act,
Congress enacted the SALT deduction cap with an illegitimate motive—to punish States that have
elected to raise revenue through relatively high taxes and to make substantial public investments.
In similar contexts, courts have considered similar kinds of statements to determine whether the
responsible governmental actors were motivated by illegitimate ends. See, e.g., Trump v. Hawaii,
138 S. Ct. 2392, 2417-18 (2018) (considering publicly reported statements of President Trump);
Batalla Vidal v. Nielsen, 291 F. Supp. 3d 260, 276-77 (E.D.N.Y. 2018) (finding evidence of
discriminatory purpose in the elimination of the Deferred Action for Childhood Arrivals program
based on President Trump’s public statements). And courts have done so even in the context of
Congress’s Article I powers. See, e.g., Bailey v. Drexel Furniture Co. (Child Labor Tax Case),
259 U.S. 20, 37 (1922) (“[A] court must be blind not to see that the so-called tax is imposed to
stop the employment of children within the age limits prescribed. . . . All others can see and
understand this. How can we properly shut our minds to it?”). 16 Given that the SALT deduction
cap “intrudes broadly into an area of traditional state regulation, a closer examination of the
justifications that would prevent” the cap “from exceeding federal authority[] is uniquely
reinforced by federalism concerns.” Massachusetts, 682 F.3d at 13.

searching inquiry into Congress’s motives when it intrudes on federalism concerns, as it has done
here. See, e.g., Massachusetts, 682 F.3d at 11-12; Windsor, 699 F.3d at 186.
16

Defendants also suggest (Defs.’ Reply Br. at 20) that the statements are unpersuasive
because they were made outside of legislative proceedings. But in determining whether a facially
neutral law has discriminatory intent, courts have looked at a broad array of evidence, not
confined to the strict confines of the legislative process. See, e.g., Church of Lukumi Babalu Aye,
Inc. v. City of Hialeah, 508 U.S. 520, 540 (1993) (“Relevant evidence includes, among other
things, the historical background of the decision under challenge, the specific series of events
leading to the enactment or official policy in question, and the legislative or administrative
history, including contemporaneous statements made by members of the decisionmaking body.”).
16

Defendants’ fear (Defs.’ Reply Br. at 20) that the Court’s consideration of public
statements will result in a slippery slope of constitutional invalidity is unfounded. As noted, courts
routinely consider statements made by public officials to evaluate whether a facially neutral law
was motivated by an invidious purpose. See also, e.g., McCreary County v. ACLU of Ky., 545
U.S. 844, 851 (2005) (First Amendment); Church of Lukumi Babalu Aye, Inc. v. City of Hialeah,
508 U.S. 520, 540 (1993) (same). And the statements cited in the complaint were not off-hand
comments. Rather, they were considered statements about the SALT deduction cap from the
principal sponsors and enforcers of the 2017 Tax Act, including Speaker of the House Paul Ryan
and Treasury Secretary Steven Mnuchin. See Pls.’ Exs. 90, 97. Courts are fully able to discern
between the kinds of probative statements at issue here, and insignificant statements that have
little bearing on Congress’s true motive.
Defendants are also mistaken when they argue that this Court should ignore Congress’s
illegitimate motive because Congress also “had a legitimate purpose: to raise revenue to offset
the effects of tax cuts in the Act.” Defs.’ Reply Br. at 20. As the Plaintiff States have explained
(Compl. ¶¶ 89-97), that motive, too, is suspect, as the Plaintiff States will pay the vast majority
of the revenue generated by the 2017 Tax Act, although they get the least benefits from the Act
relative to other States. Congress’s revenue-generating motive only highlights that Congress
targeted the Plaintiff States for unequal treatment.
Even if this Court does not consider the statements of public officials, summary judgment
on the Plaintiff States’ equal sovereignty claim is still warranted, because there is ample additional
evidence that the Plaintiff States continue to be targeted for unfavorable treatment. Most recently,
the IRS published guidance undercutting one of the legislative solutions that States have enacted

17

to alleviate the adverse effects of the SALT deduction cap. 17 A recent audit of IRS’s processes
for issuing the guidance makes clear that it is targeted at the Plaintiff States: “high-ranking
administration departments and officials—including the White House Office of Management and
Budget, the National Economic Council and Treasury Secretary Mnuchin—all collaborated to
neutralize those State efforts.” 18
Defendants argue (Defs.’ Reply Br. at 22 n.15) that this guidance is irrelevant because it
is “neutrally applicable.” But, as explained above, Congress is not free to target the States for
unequal treatment under the pretense of facial neutrality. Moreover, evidence is already emerging
that the new guidance will be enforced in a discriminatory manner that favors defendants’ political
interests. For example, when discussing the proposed rule, Secretary Mnuchin invited small
businesses to exploit a loophole that would undermine the SALT deduction cap itself—the very
purpose of the guidance in the first place. 19

17

See Internal Revenue Service, Guidance on Certain Payments Made in Exchange for
State and Local Tax Credits, Notice 2018-54 (May 23, 2018), https://www.irs.gov/pub/irs-drop/n18-54.pdf. IRS subsequently proposed a rule to formally codify the guidance. See Contributions
in Exchange for State or Local Tax Credits, 83 Fed. Reg. 43,563 (proposed Aug. 27, 2018) (to be
codified at 26 C.F.R. pt. 1).
18

Jim Tankersley, SALT Limit Is Hitting 11 Million Tax Returns, Audit Finds, N.Y. Times,
Feb. 26, 2019, https://www.nytimes.com/2019/02/26/us/politics/treasury-salt.html.
19

Press Release, U.S. Dep’t of Treasury, Treasury Secretary Mnuchin Statement on
Clarification for Business Taxpayers: Contributions Under State and Local Tax Credit Programs
Generally Deductible as Business Expenses (Sept. 5, 2018), https://home.treasury.gov/news/
press-releases/sm472.
18

CONCLUSION
For all of the foregoing reasons and those stated in the Plaintiff States’ complaint and prior
brief, the Plaintiff States respectfully request that the Court deny Defendants’ motion to dismiss
and grant the Plaintiff States’ cross-motion for summary judgment.
Dated: New York, New York
March 22, 2019

STATE OF NEW YORK
LETITIA JAMES
Attorney General
By:. /s/ Caroline A. Olsen
.
Caroline A. Olsen
Assistant Solicitor General
[e-mail]
Eric Haren
Special Counsel to the Solicitor General
[e-mail]
Owen T. Conroy
Assistant Attorney General
[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)

Barbara D. Underwood
Solicitor General
[e-mail]
Matthew Colangelo
Chief Counsel for Federal Initiatives
[e-mail]
Steven C. Wu
Deputy Solicitor General
[e-mail]

Attorney for Plaintiff
State of New York

(Signature block continues on next page)

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STATE OF CONNECTICUT

STATE OF MARYLAND

WILLIAM TONG
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
Assistant Attorney General
Civil Division
[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
* Admitted pro hac vice.

20