Tax deductions

Supreme Court Should Stop State Trial Over Tax Deductions

Outside the Internal Revenue Service building in Washington, DC (Jonathan Ernst / Reuters)

Four state governments are continue their legal action against the federal government to defend their alleged right to have the taxes they levy on their citizens fully deductible from the federal taxes of those citizens. This trial has not had much luck in the courts and shouldn’t start to get so now that the states have gone to the Supreme Court. I still took a look at it because, in their initial legal complaint, the states misleadingly cited one of my Corner articles.

They dropped that part of the argument, but what’s left isn’t much better.

States want full deductibility because their high-income constituents want it, because it keeps more money in their jurisdiction, and because it relieves pressure to reduce state taxes and spending. Republicans who controlled Congress and the Presidency in 2017 capped the deduction to raise money to offset tax cuts, to raise that money in a way that mainly spared Republican voters, and to reduce what they considered an inappropriate subsidy from low-tax states to high-tax states.

The lawsuit says that full deductibility is implicit in the Constitution, part of its federalist structure. But even if it doesn’t, the lawsuit says when Republicans capped deductibility, they were in an impermissible way trying to get liberal states to change the way they govern themselves.

This part of the trial presents two difficulties: Everyone concedes that the federal government can encourage states to adopt certain policies even if it cannot force them, and lawmakers usually have multiple motives for what they adopt. States must therefore establish that the cap on the deduction puts too much pressure on state governments to change their policies and that constraining them was the “dominant” objective of the cap.

States are trying to avoid their path to this conclusion. Their testimony consists entirely of statements by officials who, in their view, suggest that the cap was put in place “at least in part” to “force” states to cut taxes and spending (p. 10). At the end of their filing, “putting pressure” on states became “a dominant objective” (p. 22).

They cite four statements from officials; they are probably the best they have. Paul Ryan, as Speaker of the House, has twice said that without a cap, low-tax states subsidize high-tax states. Steve Mnuchin, as Secretary of the Treasury, said, “I hope” state governments will limit their taxes and spending after the cap. Then-President Donald Trump said the cap would give state voters an incentive to “make sure your politicians are doing a good job of running your state.” On the face of it, none of these statements indicate that officials believed the cap would order or compel states to do anything.

The case presented by these four blue states is therefore unconvincing in several senses of the word, and judges should have no trouble scrapping it.

Ramesh Ponnuru is editor-in-chief of National exam, columnist for Bloomberg Notice, Visiting Fellow at the American Enterprise Institute and Principal Investigator at the National Review Institute.