State v. Mnuchin

• Decision Date: 30 September 2019
• Docket Number: 18-CV-6427 (JPO)
• Parties: STATE OF NEW YORK, State of Connecticut, State of Maryland, and State of New Jersey, Plaintiffs, v. Steven T. MNUCHIN, in his official capacity as Secretary of the United States Department of Treasury, United States Department of Treasury, David J. Kautter, in his official capacity as Acting Commissioner of the Internal Revenue Service, United States Internal Revenue Service, and the United States of America, Defendants.
• Court: U.S. District Court — Southern District of New York

408 F.Supp.3d 399

STATE OF NEW YORK, State of Connecticut, State of Maryland, and State of New Jersey, Plaintiffs,

v.Steven T. MNUCHIN, in his official capacity as Secretary of the United States Department of Treasury, United States Department of Treasury, David J. Kautter, in his official capacity as Acting Commissioner of the Internal Revenue Service, United States Internal Revenue Service, and the United States of America, Defendants.

18-CV-6427 (JPO)

United States District Court, S.D. New York.

Filed September 30, 2019

Justin Robert Wagner, Matthew Colangelo, Owen Thomas Conroy, New York State, Office of the Attorney General, Caroline Anais Olsen, New York, NY, Mark Francis Kohler, Michael K. Skold, Connecticut Office of the Attorney General, Hartford, CT, Sarah Whynne Rice, Maryland Office of The Attorney General, Baltimore, MD, Jeremy M. Feigenbaum, Pro Hac Vice, Office of The New Jersey Attorney General, Trenton, NJ, for Plaintiffs.

Jean-David Barnea, Rebecca Sol Tinio, U.S. Attorney's Office, SDNY, Jean-David Barnea, New York, NY, for Defendants.

OPINION AND ORDER

J. PAUL OETKEN, District Judge:

On December 22, 2017, President Trump signed into law the Tax Cuts and Jobs Act,¹ Pub. L. No. 115-97, 131 Stat. 2054 (2017), which made several substantial amendments to the federal Tax Code. Among other things, the Act took the novel step of placing an upper limit on the amount a taxpayer may deduct from her federally taxable income to offset those sums she has paid toward certain state and local taxes (the "SALT cap"). Id. § 11042, 131 Stat. at 2085–86.

Concerned that the introduction of the SALT cap could impair their ability to pursue their own preferred tax policies, four Plaintiff States — Connecticut, Maryland, New Jersey, and New York (the "States") — filed this suit against the federal government (the "Government"), alleging that the SALT cap violates the federalism principles that undergird the U.S. Constitution.² (Dkt. No. 1.) The Government has moved to dismiss, contending that this Court lacks jurisdiction over the suit and that the States have failed to state a valid legal claim. (Dkt. No. 42.) The States, in turn, have filed a cross-motion for summary judgment. (Dkt. No. 44.) For the reasons that follow, the Government's motion to dismiss is granted and the States' cross-motion is denied.

I. Background

The Court begins its treatment of this case's background by providing some historical context regarding the federal government's taxing power and the deduction affected by the SALT cap. The Court then describes the enactment of the SALT cap and the public discussion around it. Finally, the Court explains the path this litigation has traveled to date.

A. Historical Background

The federal government derives its authority to "lay and collect Taxes" from Article I, section 8 of the U.S. Constitution. U.S. Const. art. I, § 8, cl. 1. But, as all taxpayers well know, this grant of authority has not displaced the concurrent taxing power of the states. See Gamble v. United States , ––– U.S. ––––, 139 S. Ct. 1960, 1969, 204 L.Ed.2d 322 (2019) (citing taxation as an example of dual state-federal regulation "that comes immediately to mind"). Nor was it intended to do so. As the Constitution was being ratified, the Framers attempted to address concerns about the scope of the proposed federal tax authority by reassuring the public that although a federal law "laying a tax for the use of the United States would be supreme in its nature, and could not legally be opposed or controlled," a federal law "for abrogating or preventing the collection of a tax laid by the authority of the State ... would not be the supreme law of the land, but a usurpation of power not granted by the Constitution." The Federalist No. 33 (Alexander Hamilton); see also Bruce Ackerman, Taxation and the Constitution , 99 Colum. L. Rev. 1, 7 (1999) (describing ratification-era fears that the Constitution's "wide grant of taxing authority" would "centraliz[e] tyranny"). Soon after ratification, the introduction of the Tenth Amendment created an explicit textual guarantee "reserv[ing] to the States respectively, or to the people," any "powers not delegated to the United States by the Constitution, nor prohibited by it to the States." U.S. Const. amend. X.

In the nation's early years, the federal government wielded its taxing power with relative modesty, collecting virtually all its revenue from customs duties alone. See Aaron T. Knapp, The New Jersey Plan and the Structure of the American Union , 15 Geo. J.L. & Pub. Pol'y 615, 643 (2017). There were, to be sure, a few early, unpopular efforts to implement limited excise and property taxes, as well as the occasional temporary tax designed to plug wartime revenue gaps, but up through the first half of the nineteenth century the federal government generally steered wide of taxes that reached within the states' borders.³ See id. ; William E. Foster, Partisan Politics and Income Tax Rates , 2013 Mich. St. L. Rev. 703, 707–08 & n.27. Indeed, from the end of the War of 1812 until the Civil War, "[t]here were no federal income taxes, direct taxes, or excise taxes — in short, no internal taxes of any kind." Anuj C. Desai, What a History of Tax Withholding Tells Us About the Relationship Between Statutes and Constitutional Law , 108 Nw. U. L. Rev. 859, 871 (2014).

The financial burdens of the Civil War, though, "necessitated a dramatic shift in federal tax policy," id. , and the result was "the first federal income tax in U.S. history," id. at 872. As initially enacted in 1861, that tax imposed a 3% levy on annual income over $800 but provided that, "in estimating [taxable] income, all national, state, or local taxes assessed upon the property, from which the income is derived, shall be first deducted." Act of Aug. 5, 1861, ch. 45, § 49, 12 Stat. 292, 309. While the specifics of the tax underwent several modifications over the years it was in effect, the deduction for state and local taxes remained substantially intact. 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 Mar. 3, 1865, ch. 78, 13 Stat. 469, 749; Act of Mar. 2, 1867, ch. 169, § 13, 14 Stat. 471, 478; Act of July 14, 1870, ch. 255, § 9, 16 Stat. 256, 258.

Shortly after the Civil War, in 1872, the federal income tax was left to lapse, and "the nation returned to reliance on tariffs and excises to fill the federal coffers." Foster, Partisan Politics and Income Tax Rates , 2013 Mich. St. L. Rev. at 710 n.40. But by 1894, rising popular support for progressive taxation prompted Congress to give the federal income tax another go. Id. at 710–11. The resulting tax, like its predecessors, excluded "all national, State, county, school, and municipal taxes, not including those assessed against local benefits," from taxable income. Act of Aug. 27, 1894, ch. 349, § 28, 28 Stat. 509, 553. And, like its predecessors, the tax enacted in 1894 was short lived. The very next year, in Pollock v. Farmers' Loan & Tr. Co. , 157 U.S. 429, 15 S.Ct. 673, 39 L.Ed. 759 (1895), the Supreme Court held that the federal income tax violated the constitutional requirement that any "direct" taxes be apportioned among the states in relation to their relative populations, id. at 582–83, 15 S.Ct. 673 ; see also U.S. Const. art. I, § 9, cl. 9 ("No capitation, or other direct, tax shall be laid, unless in proportion to the census or enumeration hereinbefore directed to be taken.").

Pollock drew a backlash and, with it, a push to eliminate the apportionment requirement that had scuppered Congress's 1894 efforts. See Erik M. Jensen, Murphy v. Internal Revenue Service, the Meaning of "Income," and Sky-Is-Falling Tax Commentary , 60 Case W. Res. L. Rev. 751, 770–71 (2010). Thus, in 1909, Congress passed a proposed constitutional amendment that would guarantee it 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." U.S. const. amend. XVI. Of course, the proposed amendment had its detractors. For example, New York's then-Governor, Charles Evans Hughes, opposed ratification out of concern that it would allow the federal government to tax income derived from state or municipal bonds.⁴ See Marjorie E. Kornhauser, The Origins of Capital Gains Taxation: What's Law Got to Do with It? , 39 Sw. L.J. 869, 918 n.295 (1985). And state legislators from Virginia and Georgia described their (at times racist) fears that the amendment would permit federal intrusion into state matters. See Robin L. Einhorn, Look Away Dixieland: The South and the Federal Income Tax , 108 Nw. U. L. Rev. 773, 792–94 (2014). But such hesitations were unavailing, and upon the proposed amendment's 1913 ratification, the Sixteenth Amendment became the law of the land.

Congress wasted little time in flexing its newly defined taxing authority. On October 3, 1913, it enacted the first federal income tax of the twentieth century. Act of Oct. 3, 1913, ch. 16, § II, 38 Stat. 114, 166–81. That tax, like its nineteenth-century forebears, deducted from taxable income "all national, State, county, school, and municipal taxes paid within the year, not including those assessed against local benefits." Id. § II(B), 38 Stat. at 167. And from then to now, some form of state and local tax deduction (a "SALT deduction"), has been a mainstay of the federal Tax Code. (See Dkt. Nos. 54-28 to 54-83.) As the House Committee on Ways and Means explained in 1963, the deduction "represents an important means of accommodation where both the State and local governments on one hand and the Federal Government on the other hand tap th[e] same revenue source." H.R. Rep. No. 88-749, at 48 (1963).

Notwithstanding its baseline durability, the SALT deduction has taken various forms over the years. See Gladriel Shobe, Disaggregating the State and Local Tax Deduction , 35 Va. T...