A federal judge today dismissed a lawsuit by four states, including Maryland, against the Trump administration, the U.S. Department of Treasury, and the Internal Revenue Service challenging the $10,000 limit on state and local tax (SALT) deductions enacted by the 2017 federal tax reform law. The suit alleged that the SALT cap violated the U.S. Constitution’s Equal Protection Clause and the 10th Amendment, which protects states’ rights.

“The cap, like any federal tax provision, will affect some taxpayers more than others and, by extension, will affect some states more than others. But the cap, again like every other feature of the federal Tax Code, is a part of the landscape of federal law within which states make their decisions as to how they will exercise their own sovereign tax powers” Judge J. Paul Oetken wrote in his opinion.

“Because the States have failed to plausibly allege that the cap, more so than any other major federal initiative, meaningfully constrains this decision-making process, this Court has no basis for concluding that the SALT cap is unconstitutionally coercive.”

The SALT deduction allows taxpayers to subtract state and local income, sales, and property taxes from their federal tax payments. The 2017 federal tax overhaul capped SALT deductions at $10,000 – a move of particular import in states like Maryland.

According to The Baltimore Sun:

Maryland Attorney General Brian Frosh joined his counterparts in Connecticut, New York and New Jersey in filing the lawsuit last year, saying the cap “disrupts the longstanding balance of taxing power between the states and the federal government.”

A spokeswoman for Frosh, a Democrat, said he is “still reviewing the decision and assessing next steps.”

In response to the SALT cap, some states passed legislation to allow local governments to create charitable funds to pay for local services and offer property tax credits to incentivize residents to give. Those taxpayers could then write off the payment as a charitable deduction on their federal income tax return – cap-free.

Under the final IRS regulations, a taxpayer making payments to an entity eligible to receive tax-deductible contributions must reduce the federal charitable contribution deduction by the amount of any state or local tax credit that the taxpayer receives or expects to receive in return, effectively squashing the workaround.

Stay tuned to Conduit Street for more information.

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Previous Conduit Street Coverage: Maryland Joins Three States In SALT Suit

Previous Conduit Street Coverage: Feds Squash SALT Cap Workarounds

Previous Conduit Street Coverage: Local Tax Deduction Elimination: “SALT” In Maryland’s Wounds

The Baltimore Sun: Judge Tosses Lawsuit that Challenged New Federal Tax Law that Limits Deductions