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SALT Cap Case Not Going Far, Former NGA Head Predicts

Posted on Aug. 8, 2019

The case brought by states challenging the $10,000 cap on the state and local tax deduction likely won’t go far, according to the recently departed head of the National Governors Association.

Scott Pattison, the NGA’s former executive director and CEO, on August 7 called the decision by congressional Republicans to include the SALT cap in the Tax Cuts and Jobs Act “exceptionally partisan and political.”

Speaking during the Multistate Tax Commission’s annual meeting in Boise, Idaho, Pattison said he and the NGA’s lobbyists on Capitol Hill believed the concerns of the states weren’t being heard during the drafting of the TCJA because so much of congressional decision-making on taxes is now done behind the scenes.

“This gets me to really fearing that Congress might really be using its tax authority to effectively make political decisions and punish states,” Pattison said. Every senator from the 10 states most affected by the SALT cap is a Democrat, and most voters in those states went for Hillary Clinton in the last presidential election, he said, while those in all 10 of the least affected states voted for Trump.

Still, Pattison said he would be “hard-pressed to predict that this will go particularly far in the courts, or that ultimately the Supreme Court would not uphold the authority of Congress,” which has placed limits on the SALT deduction cap in the past.

“Even though I witnessed that it was done for political reasons, I just don’t think that the political targeting argument that the states are using is going to work,” Pattison said.

From left: Helen Hecht, Shirley Sicilian, Scott Pattison, and Joe Huddleston at the Multistate Tax Commission’s 52nd annual meeting in Boise, Idaho.
From left: Helen Hecht, Shirley Sicilian, Scott Pattison, and Joe Huddleston at the Multistate Tax Commission’s 52nd annual meeting in Boise, Idaho. (Photo by Amy Hamilton)

MTC General Counsel Helen Hecht said she’s sure that members of Congress believed that what they were doing is constitutional. She said her theory is that the Supreme Court in its decisions sometimes tells Congress not to step over the line in trying to regulate state taxation.

Pattison, however, said the temptation is strong for members of Congress and other elected officials to get the result they want. So even as federal lawmakers talk about principles of federalism, there’s little incentive for them to exercise restraint in preempting state taxation, he said.

Courts, and the Supreme Court in particular, thus could have a real impact on state tax sovereignty and federalism issues, Pattison said.

The Roberts Court

Hecht said the pinnacle of deference to federal power was reached at some point in the 20th century, but that the Supreme Court has been moving back toward recognizing the powers of the states. Decisions in favor of the states on anti-commandeering rules and state sovereignty are more prominent in the Court now led by Chief Justice John G. Roberts Jr., she said.

Shirley Sicilian of KPMG LLP said the Roberts Court also is willing to rethink its decisions, having overturned Quill’s physical presence test for sales and use tax purposes with South Dakota v. Wayfair Inc., and having overruled Nevada v. Hall with its decision earlier this year in California Franchise Tax Board v. Hyatt. At the same time, Sicilian said, the Court is trying to articulate when it is appropriate to depart from stare decisis.

Joe Huddleston of EY, speaking on his own behalf, said the Court’s 2018 decision in Murphy v. NCAA “is either going to be one of the more important cases of the last couple decades or it’s going to have no significance whatsoever.”

“It has some rather remarkable language about state tax sovereignty,” Huddleston said.

In Murphy, the Court said Congress cannot commandeer the legislative processes of the states by directly compelling them to enact and enforce a federal regulatory program. Citing The Federalist Papers, Justice Samuel A. Alito Jr., writing for the majority, said the Constitution limits, but does not abolish, the sovereign powers of the states. The Court also said the legislative powers granted to Congress are sizable but not unlimited.

“That’s clearly not the direction we’ve been going for years, but Murphy kind of brings us back to center,” Huddleston said. He added that if that decision shows the direction in which the Court is going, “we will be hearing much more about the 10th Amendment down the road.”

Also, if the anti-commandeering rule is the law, there are about 100 federal statutes that directly command the states to take certain actions, Huddleston said. “Are all of those statutes now unconstitutional?” he asked. For example, he wondered whether Public Law 86-272, the 1959 federal statute barring states from imposing net income taxes on businesses that are only soliciting orders in a state, is constitutional on its face, given the anti-commandeering rules set out by Murphy. Huddleston said he doesn’t know the answer, but that he suspects the Court will either have to provide guidance or find a way to ignore the anti-commandeering rule.

Hecht recommended Alito’s majority opinion because it delves into the difference between the anti-commandeering rule and preemption, while Sicilian said federal preemption of state taxing authority does not involve Congress requiring the states to enforce a federal regulatory regime.

“You have to get further down in the constitutional analysis to get to what we typically deal with, which is preemptions,” Sicilian said. “Murphy was dealing with a question that was way up in the analysis, which was 'Does Congress even have the authority to do this?'”

But Huddleston said Congress for years has ignored even that part of the constitutional analysis. “The first step is the critical one,” he said, referring to whether Congress has authority to regulate the states in a given instance. The Constitution “is pretty clear black-letter law in terms of what those parameters are,” he added. 

“The question ultimately becomes how do you change the rules over time?” Huddleston said. “Do you make the game be played within the four corners of the rules, or do you change the rules to reflect the changing game?”

Sicilian said most state tax preemption scenarios involve Congress exercising express authority to act under the commerce clause. Assuming congressional preemption of state taxation addresses some form of discrimination against interstate commerce in favor of in-state commerce, it’s probably a valid exercise of an enumerated power of Congress, she said.

Sicilian added that the Court typically doesn't have to go beyond the plain language of a federal statute to decide a case involving federal preemption of state taxing authority. The MTC has argued that the Court should err on the side of narrow construction and a balancing of the states’ interests when interpreting an unclear federal statute preempting state tax authority, but the Court didn't need to go beyond the statutory language in CSX Transportation Inc. v. Alabama Department of Revenue or in Dawson v. Steager, she said.

However, when there’s a dormant commerce clause issue, there’s no statute for the Court to interpret. “That’s why we see more balancing in the dormant commerce clause cases,” Sicilian said.

Hecht asked panelists how credible they believe threats are from industry that Congress could act if states are too aggressive in interpreting, for example, how P.L. 86-272 applies in the digital economy. Observers have also questioned whether states are going too far in interpreting the economic nexus parameters the Court approved in Wayfair

“My view would be you can’t be too aggressive,” Pattison said of the positions states are taking. This caught Hecht by surprise. Pattison again referred to the politics-driven environment at the federal level. “People seem to be most successful really staking out very strong positions,” he said.

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