Written by Katie Hyma
“Our new Constitution is now established, and has an appearance that promises permanency; but in this world nothing can be said to be certain, except death and taxes.” — Benjamin Franklin, in a letter to Jean-Baptiste Leroy, 1789.
The U.S. tax bill passed on Wednesday, December 20, 2017, includes a provision capping deductions for state and local income and property taxes (“SALT”) at $10,000. Due to the differences in income and property tax rates from state-to-state, similarly situated individuals in states with high SALT rates may end up paying a higher effective federal income tax rate than individuals in states with low SALT rates.
In states with high tax rates and high cost of living, there is speculation that the increased federal tax burden will hamper state efforts to raise tax revenue and may even deter workers from relocating to these states. These states include New York, Connecticut, New Jersey, California, Massachusetts, Illinois, Maryland, Rhode Island, and Vermont—all states which have been reliably voting Democratic, and none of which have a single Republican senator.
Governors and legislators in New York, New Jersey, and California have indicated that they may challenge the law. New York Governor Andrew Cuomo has not only vowed to challenge the law, but he has also discussed various state actions that could work to offset the loss of the unlimited SALT deduction. Indeed, Mr. Cuomo signed an executive order allowing New Yorkers to pay 2018 property taxes in 2017, before the SALT cap takes effect.
Cuomo hinted at an Equal Protection challenge: “They’re now robbing the blue states to pay for the red states . . . it is an economic civil war, and make no mistake, they are aiming to hurt us . . . We believe it is illegal and we will challenge it in court as unconstitutional . . . the first federal double-taxation in history, violative of states’ rights and the principle of equal protection.”
While the effect of the tax law may be unequal, to be unconstitutional, the law must have been passed with a discriminatory purpose. That is, evidence must be presented which demonstrates that the law was passed at least in part because of, and not merely in spite of, the fact that it would burden Democratic states. This is a high evidentiary hurdle.
Even if a discriminatory purpose is found, the Equal Protection Clause does not necessarily forbid discrimination. Laws can, and do, discriminate all the time. When that discrimination is invidious, such as against race, national origin, or sex, the law would be unconstitutional under the Equal Protection Clause. Yet, other types of discrimination are within the legislature’s power. Indeed, many current tax deductions, credits, or exemptions benefit some states more than others. For example, solar energy credits benefit states with more sunshine. None of these have run afoul of the Equal Protection Clause.
However, other constitutional provisions provide certain protections against discrimination, and coupled with the Equal Protection Clause, may create a stronger case for unconstitutional discrimination. Here, the First Amendment right to expressive association may be implicated. Were the SALT deduction capped for Democrats, but not Republicans, there would be a clear violation. Although that is not the case here, it may be that state residence was used as a proxy for political affiliation, and so long as the purpose to discriminate can be shown, the constitutional challenge may have traction.
Sovereignty may be violated when a federal law that departs from the “fundamental principle of equal sovereignty among the States” (i.e. burdens or benefits states disproportionately) is only justifiable when the “disparate geographic coverage is sufficiently related to the problem that it targets.”
In 2013, this principle was articulated when the Supreme Court invalidated the coverage formula of the Voting Rights Act (VRA)—a law passed in response to address voting discrimination that required States to obtain federal permission before enacting any law related to voting. States were treated differently based on whether they mandated a prerequisite for voting (e.g., a literary or moral character test) and had less than 50% voter registration or turnout in the 1964 Presidential election. This requirement expired after five years, but it was reauthorized several times. In 2006, Congress reauthorized the act until 2031 and broadened the scope of forbidden activities, but the coverage formula was based on voter turnout as of 1972. The Court found that the coverage formula, though sufficiently related to the problem in 1965, was not sufficiently related in 2013.
Here, while the VRA provision applied only to some states (insofar as states which did not meet the coverage formula provisions were excused from federal oversight), the law applies equally to all states. Moreover, Congress has not limited how states may legislate. A case could still be made, however, that the federalist principle of equal treatment of the states extends to tax treatment.
Again, though, the more practical concern may be the high evidentiary hurdle. What is fair? Does the cap unfairly subsidize high-tax states, or does it shifting more of the tax burden onto states which already contribute more toward taxes? Was there an invidious congressional motive? Where is the proof?
The federal government can also run afoul of state sovereignty when it conditions federal grants on state compliance. While this sort of conditioning is quite common, it must not be “unduly coercive.” The Medicaid expansion was found unconstitutional because withholding 20% of the state’s total budget for the expansion of Medicaid was found to be coercive—states were left with no genuine choice whether to accept it or not. An argument could be made that extracting more taxes from high SALT states is coercive enough to restrict their lawmaking decisions and thus violate state sovereignty.
The issue of double-taxation could also be presented as a violation of state sovereignty. Although double-taxation is common (e.g. the corporate income tax combined with taxes on distributions, the state tax combined with local income taxes, out of state income being taxed in two states), in 2015 the Supreme Court found that it was unconstitutional for Maryland to deny taxpayers a credit for taxes paid to other states. An argument could be made that the principle applies to the SALT deduction, but the Maryland case was decided under the dormant Commerce Clause, which limits states from interfering with federal power. The dormant Commerce Clause is not relevant to federal law.
The Sixteenth Amendment
Alternatively, states could challenge the deduction as unconstitutional by arguing that the Sixteenth Amendment, which authorizes federal income tax, only contemplated taxation of “income” after state taxes had been paid, making the SALT deduction Constitutionally protected.
Tax law is about striking balance. Indeed, history suggests that the Sixteenth Amendment, which created the federal income tax, would not have been ratified without the availability of the SALT deduction. New York may have been footing roughly 25% of the federal income tax bill at the time it was passed, and ironically, may never have signed without the availability of the SALT deduction.
Yet, the Supreme Court has characterized tax deductions as a “legislative grace,” not a constitutionally-protected right.
Procedural Due Process
Another approach may be to challenge the law on the grounds of Fifth Amendment procedural due process. The argument would be that Republican party donors “cross[ed] the line of legitimate campaign contributions into illegal bribery,” violating the Congressional duty to make laws through legitimate processes.
Many commentators agree that the constitutional challenges would not be very likely to succeed. If they did, however, the short-term win for the challengers may hamper efforts to pass other tax legislation in the future. A federalism challenge may be particularly damaging to Democrats, who rely on federal tax revenue to fund progressive programs.
Smyth, Albert Henry (1907). The Writings of Benjamin Franklin, Vol. X (1789-1790). New York: MacMillian. p. 69.
Michael C. Dorf, The New Tax Law Punishes Blue States: Is That Constitutional?, Verdict (Dec. 27, 2017).
Ben Casselman, Democrats in High-Tax States Plot to Blunt Impact of New Tax Law, The New York Times (Dec. 31, 2017).
Debra Cassens Weiss, Does Tax Bill Violate the Constitution by Treating Residents of High-Tax States Differently?, ABA Journal.com (Jan. 4, 2018).
Jimmy Vielkind, In State of State Speech, Cuomo Vows to Sue Federal Government Over Tax Bill, Politico (Jan. 3, 2018).
Stephen Gardbaum, Is the GOP Tax Law Unconstitutional?, San Francisco Chronicle (Dec. 22, 2017).
US Tax Bill May Face Lawsuits from High-Tax States with Long Odds but Political Payoffs, Reuters, (Dec. 21, 2017).
Photo courtesy of US News & World Report.