The New Tax Law Punishes Blue States: Is That Constitutional?

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Posted in: Constitutional Law

The changes to the tax code passed by Congress last week overwhelmingly benefit corporations and wealthy individuals, although they also include measures that cut taxes on most middle-class taxpayers, albeit only temporarily. Despite the Trump administration’s claim that the tax cuts will pay for themselves through increased economic growth, they will almost certainly decrease the amount of revenue the federal government collects. To compensate for some of that lost revenue, the new legislation includes measures that will result in net tax increases, even in the short term, for a non-trivial minority of taxpayers.

That, in itself, is unremarkable. All legislation involves tradeoffs, tax legislation especially so.

More disturbing is the distribution of the added tax burdens Congress has imposed. Prior to the new law, state and local taxes (SALT) were deductible against federal income. By capping such deductibility at $10,000, the new law effectively targets its tax increases on upper-middle-class taxpayers in states with relatively high SALT.

Which states are those? Topping the list are New York, Connecticut, New Jersey, California, Massachusetts, Illinois, Maryland, Rhode Island, and Vermont. Those are all states that have, in recent years, reliably voted Democratic. None currently has a single Republican US Senator.

What if that correlation is not mere coincidence? What if it turns out that the SALT cap was included in the tax law—which passed the House and Senate without the support of a single Democrat—specifically because its burden would be felt overwhelmingly by residents of heavily Democratic states?

If Congress or a state legislature enacted a law with a racially discriminatory impact for the very purpose of disadvantaging a racial minority, that law would be unconstitutional. Does the same principle apply where, instead of favoring, say, white people over black people, Congress favors red states over blue states?

Potential Constitutional Objections

The Fourteenth Amendment says that “No State shall . . . deny to any person within its jurisdiction the equal protection of the laws.” That provision bars states from discriminating on invidious grounds, such as race, national origin, and sex. Does it also bar Congress from discriminating against particular States?

The Equal Protection Clause does not, by its terms, forbid the federal government—which is not a “State”—from discriminating against a State—which, in turn, is not a “person,” but those textual limits may not be dispositive. After all, Supreme Court cases have long said that the federal government is bound by the equal protection principle, relying on the Due Process Clause of the Fifth Amendment as a textual hook. Meanwhile, corporations are not obviously “persons” either, but numerous cases protect corporations under the Fourteenth Amendment.

Suppose someone—a constitutional law professor residing in New York State who expects his taxes to go up, say—wished to argue that just as the Constitution has been construed to give corporations equal protection rights against the federal government, so it should be construed to bar Congress from discriminating against blue states in its tax legislation. How might he go about it? Let’s consider a couple of possibilities.

First Amendment

A New York or California taxpayer who loses some of the benefit of the SALT deduction might invoke the First Amendment. If Congress enacted a law that explicitly taxed Democrats at higher rates than it taxed Republicans or vice-versa, that would be a clear violation of the First Amendment right to expressive association. That would also be true if, instead of expressly providing for different tax treatment of Democrats and Republicans, a statute used some proxy for political identification. Given the well-known phenomenon of “geographical sorting”—whereby people tend to live among like-minded people—geography is a fair proxy for political identification.

To be sure, state residence is not a perfect proxy for political affiliation. In both red states and blue states, urban areas tend to be bluest and rural areas reddest, with suburbs falling somewhere in between.

But in giving effect to constitutional provisions that contain an anti-discrimination norm—as the First Amendment does—the courts do not require plaintiffs to show that the government has disguised its illicit intent using a perfect proxy. So long as a plaintiff can show that a law with a disparate impact was deliberately adopted because of that disparate impact rather than in spite of it, a constitutional challenge can proceed.

Equal Sovereignty of the States

Or consider a second avenue of attack. In the 2013 case of Shelby County v. Holder, the Supreme Court invalidated the coverage formula of the Voting Rights Act (VRA). That formula, the Court said, was based on data that were nearly fifty years old.

But why should that matter? Congress has no general obligation to update our laws. Indeed, some laws have been on the books more or less unchanged since 1789.

The coverage formula of the VRA was different, Chief Justice Roberts wrote for the Court, because it was used to subject some, but not all, states and localities to special burdens with regard to changes in their election laws. A federal law that departs from what the Court called the “fundamental principle of equal sovereignty among the States” can only be justified if the “disparate geographic coverage is sufficiently related to the problem that it targets.” Thus, the Court concluded in Shelby County, the out-of-date coverage formula was unconstitutional.

To be sure, the Shelby County principle itself would not directly apply to a challenge to the SALT deductibility cap. The VRA preclearance requirement is a direct limit on how states may legislate, whereas the SALT deductibility cap governs taxpayers.

Yet there is reason to think that difference should not matter. After all, the Constitution contains no express principle of equal sovereignty of the states. Chief Justice Roberts instead inferred it from the principle—also not expressly stated in the Constitution but announced in  prior cases—that new states will be admitted to the Union on an equal footing with existing states. A Court that was willing to discover an unenumerated federalist principle of equal state sovereignty in Shelby County should likewise be willing to discover an unenumerated federalist principle of equal tax treatment of the states.

Proving Illicit Intent

Accordingly, whether under the First Amendment or in the application of general principles of federalism, the courts should be prepared to invalidate provisions of the tax code that discriminate against blue states out of hostility to those states or the voters who live there. Establishing those abstract principles should be relatively simple. The difficulty would arise when attempting to prove illicit intent.

Numerous tax provisions benefit or burden residents of some states more than others. Tax incentives for installing new solar panels benefit residents of sunnier states more than those with less direct sunlight. Changes in credits, deductions, and exemptions for dependent children will be felt differently in Utah—the state with the highest birth rate—than in New Hampshire—the state with the lowest. Tax law allows businesses to depreciate some kinds of assets more quickly than other kinds of assets, thereby favoring states with more of the businesses that make use of the favored assets. Given the tax code’s complexity, nearly every provision will have some disparate impact on some state or another.

The question, therefore, is not whether the new cap on SALT deductibility disfavors taxpayers in blue states relative to the prior provision. It clearly does that. The question is whether that differential impact resulted from an invidious congressional motive.

There are legitimate non-political reasons for capping SALT deductibility. For example, one might think that SALT deductions unfairly subsidize high-tax states. A resident of a low-tax state must pay for services that her state does not provide out of after-federal-tax income, while an otherwise similarly situated resident of a high-tax state was, until now, getting a federal tax deduction for the state and local taxes that went to fund that government-provided service in his state.

Yet whether the old or new system is fairer depends on the baseline. In the public debate over the new tax legislation, elected officials from New York and other high-tax states pointed out that the high-tax states also tend to be net-donor states—that is, they get back less in federal investment than they contribute through taxes—while the lower-tax states tend to be net-recipient states. It has even been suggested that the low-tax states are low-tax because they receive a disproportionate share of federal largesse, which relieves them of the need to pay for services through state and local taxation. In this view, states like New York were already paying more than their fair share of federal taxes, so shifting still more of the tax burden to their citizens can only have been motivated by crass partisan considerations.

Perhaps the most we can say is that there could be non-political reasons offered in support of the new cap on SALT deductibility, but it is not clear whether those reasons or more crassly partisan motives actually explain the legislative change.

Under these circumstances, it would be difficult to prove that Congress was actually motivated to cap SALT deductibility by partisan bias. Unlike President Trump, whose Twitter account provides a continual readout of his illicit motives for policies disfavoring Muslims, Latinos, and other minorities, most Republican Senators and House members have not left a trail of smoking guns for plaintiffs suing them for violating the Constitution. Were a court to order discovery aimed at uncovering Republican congressional defendants’ true motives, they could probably get away with pointing to some non-partisan rationale for capping SALT deductibility.

The key phrase there is “get away with.” Due to difficulties of proof, the courts probably won’t end up ruling that the SALT deductibility cap violates the First Amendment or a core principle of federalism. But no one should be fooled by the limits of what can be proven in court. In shifting some of the nation’s tax burden from over-represented red states to under-represented blue ones, congressional Republicans and President Trump acted in a crassly partisan manner and betrayed core ideals of a country that gained its independence by fighting a war against taxation without representation.

  • Brett

    Is heavier taxation by “blue” states constitutional? Also, the new tax relief law provides relief to the middle and lower class, not so much the wealthy. The tax cuts to corporations are aimed at economic and job growth (and bring America’s corporate tax rate down from one of the highest tax rates in the world). Indeed, the day it was signed by President Trump many corporations announced bonuses to employees, such as AT&T providing $200 million to 200,000 employees, in direct contradiction to Chuck Shumer’s completely false prediction only several hours earlier that none of the benefit to AT&T from the new tax relief would “trickle down” to its employees.

    • UseYourBrainDummy

      Would love to hear your reasoning behind higher taxation being unconstitutional as there’s really no basis for that. As for the rest of the tax bill, 83% of the benefits go directly to the top 1%. The rest of what you suggest is mostly trickle down/voodoo economics that has been widely debunked. The bill could have simply been a reduction in corporate tax rates and a tax holiday for overseas cash, but instead they gave $100-$200 in tax savings to a typical family while giving huge benefits to Trump and his friends. $200 million in one-time bonuses, is a 0.01% of the benefits that the top 1% will get over the next 10 years and just for show. What should be unconstitutional is burdening our kids with massive debt akin to enslavement. It’s immoral at a minimum.

  • GreginVA

    Why the outrage over the tax cuts? Some think the federal government should collect less revenue because a few states collect more in the form of extremely high tax rates. The voters of those states elected representatives that consistently increase their taxes to cover over spending. So is the federal government required to compensate for the acts of elected officials of the several states? The latest tax bill applies equally to all, any deviation in taxes paid to the federal is a direct result of actions by the state and is theirs to correct if the citizens of said state start to demand fiscal responsibility.

    • UseYourBrainDummy

      If it applied equally to all, there would be no SALT deduction or 100% SALT deduction. As implemented it’s a partisan ploy against blue states.

      • jagiela

        Oh cry me a river. When Obamacare was written, the Democrats targeted Republicans to pay the taxes and wrote the benefit formula to favor NY and CA

  • David Alger

    Another blatantly partisan screed by Dorf. What little value his attempts at analysis may offer, his end of article summary leaves no doubt in my mind that his purpose here is political and not scholarly.

    • James Lewis

      Agreed, Mr. Alger. Mr Dorf appears to have become lost somewhere between the massive duplication federal funding approves under Clintons Welfare reform bill and Senator Bradleys Bradley Amentment of 1985. They will soon loose a major portion of that money. The only thing the former administration created was a massive welfare state for citizens and the attorneys that partisipate in it. By the way Mr. Dorf, your not one of that those dead beat dad child support enforcement attorneys are you that is filing for 66% percent federal sub funding for destroying families by contract law firms?

      • Scott McGowan

        Pat your child support and you wouldn’t need support enforcement. I worked in that system for over a decade. Why should the state be forced to pay what the dead beat father should have been paying for HIS child?

  • Colin

    Professor Dorf, thank you for the insightful piece and your many contributions to Verdict. But as to your final point–that the new tax bill has “shift[ed] some of the nation’s tax burden from over-represented red states to under-represented blue ones”–would it not be more appropriate to say, “Shifted back”? Under provisions that permit unlimited deductions for SALT, do those not effectively shift the federal tax burden upon citizens of states and municipalities with lower SALT burdens?

    Local and state taxes are designed to benefit the local and state citizenry to the exclusion of the national citizenry. Federal taxes, of course, are intended to benefit on a national basis. By allowing citizens to deduct SALT from their federal taxes, citizens of those states and municipalities who choose to tax at a higher rate–thereby able to provide a higher value of services to their citizens–are able to benefit directly from their local or state taxes while paying a smaller portion to the federal government than a citizen in a state or municipality with lower tax rates. Consequently, it would seem, under an uncapped deduction for SALT, when states or municipalities choose to increase their taxes, they have actually shifted money away from the federal taxing structure to the exclusive benefit of their own citizens. Hence my phrasing of “shifted back.” Although this necessarily has a partisan impact due to the greater likelihood of traditionally “blue” states having higher tax rates, I do not see it as necessarily partisan in nature. It seems only fair that citizens who choose to be taxed locally at higher rates should not be permitted to shift that local decision to those who do not.

    I also cannot see how this is a matter of “taxation without representation”–though I take that statement to be largely hyperbole. Surely those citizens of states and municipalities that have chosen to tax at higher rates have access to ballots to elect their state and local officials who have chosen to pass statutes and ordinances enabling their higher tax burden? As to the national level, you have indicated that each of the nine states most hard hit are states that have no sitting GOP senators. With all 47 Democrat senators and Senator Sanders of Vermont attending the vote and voting against it, it would seem they had representation, just that the outcome wasn’t what many of those citizens desired.

    Let my critique not be viewed as personal. I quite enjoy your insights, Professor Dorf, and look forward to reading your pieces when they land in my inbox. Thank you again for your insight.

    • UseYourBrainDummy

      IMO limiting SALT is a form of double taxation. I’m paying taxes on my state and local taxes. For it to be non-partisan, it would need to be deductible 100% or not at all. Limiting it as has been done is really a veiled attack on blue states and why it’s partisan in nature. Blue state already pay more in taxes than they get back in benefits, so if the objective is tax fairness, this certainly isn’t the way. Personally, I’d like to see it go away 100% and save the $2 trillion to pay our national debt, instead of leaving it for our kids to pay.

      • jagiela

        No blue state allows you to deduct federal taxes from income. If NY taxes money earned to pay federal taxes, the Feds may tax income earned to pay NY taxes

        The days of being subsidised are over. Pay your own way

    • Utopia217

      States should have the right to raise taxes however they wish. You shouldn’t be able to choose at the federal level what state taxes can or cannot be deducted. I’ll just point of some examples and you can make your counter arguments…

      1. Texas has no state income tax, but they have a much higher property tax (2%). For years now Texans have been complaining that the state is being flooded literally from people moving from Louisiana to Texas after Katrina. All these new people who have jobs are renting so they have no property tax, but their share of services (Police, Fire, Schooling, etc..) is being paid for by existing residents who are property owners. Do you think this is fair? California has a 1% property tax and 12% state income tax to raise revenue and is much more progressive because it taxes people who use state services.

      2. Like the article says. The blue states are already net donors. The argument that taxes in blue states are too high is 100% true. They should be lowered because blue states shouldn’t have to pay more than they are getting back. It’s the red states which should raise their taxes so they aren’t a drain at the Federal level.

      It isn’t fair blue states are already paying more than their share and this bill adds even a higher burden on blue states.

      3. States like Texas get a ton of revenue from Oil and Nevada has large revenue streams from Hotel and Gambling taxes which allows them to have lower personal taxes at the state level. Why don’t we even things out and don’t allow those states to tax those industries or have the federal government tax those industries so they don’t have to go after individuals?

      4. Urban cities offer more services and people are wiling to pay it. The subway system is a great example. I would rather pay higher taxes to be able to use a subway instead of having to spend even more money on buying a car and sitting in traffic.

      State taxes are higher because I pay to use the subway and now I cannot deduct those taxes payed for my transportation. The federal government doesn’t tax car and trunk purchases at the federal level which provide transportation for rural states.

      In theory, New York can cut their state taxes and not provide any funding for the subway and instead raise the ticket prices to ride it. Let the Federal government just try to tax subway tickets to make up the budget deficit difference is something like this happens.

      In the end States raise revenue in many different ways and just going after State Income and Property taxes deductions is not fair and can be gamed. Double taxation should not be allowed.

  • Brett

    To borrow Mr. Dorf’s logic, Obamacare is unconstitutional as the ten or twelve million small business owners and independent contractors in the U.S. are paying sky-high premiums for sky-high deductibles and out-of-pocket amounts (to help fund the socialist legislation), much more than large group policyholders.

    • UseYourBrainDummy

      That’s actually not true. Obamacare plans for most business owners and independent contractors are far less than the group policies because group policies are not eligible for Obamacare tax subsidies. Most employees don’t pay the cost of their group policy because their employer picks up much of the cost, which is just another form of pay. Not sure how it would be unconstitutional, but I guess that’s because I’ve read the constitution. If by “socialist legislation” you mean you can’t be denied coverage for pre-existing conditions, kicked off because you are actually sick, and solid benefits, then you are right. However, I think you are confusing socialism with pooled risk, but I’m sure that’s because you’ve been purposefully misinformed.

  • UseYourBrainDummy

    If you really want to be fair and reduce the deficit, i say get rid of the salt deduction 100%

  • James Lewis

    Your way off base Mr. Dorf. Illicit Intent begin with former senator Bradley of NJ, who pitched the Bradley Amendment. That amendment was the result of Reagan allowing attorneys to participate in determine what congressional legislation would look like or be. The Bradley amendment and Clintons welfare refrom bill was passed as a result. That will all be changed now. Maybe you should reconsider your education.

  • Ari

    There are many additional constitutional concerns with the elemination of SALT deductions that have nothing to do with invidious motive. My understanding is that, since the inception of the federal income tax, there have always been SALT deductions. I always assumed this was to help the federal income tax comply with federalism principles. Indeed, here are three glaring federalism issues that the new fed tax plan raises: (1) elimination of SALT deductions will lead directly to decreased state purse revenue in high tax states because residents with high income are now further incentivized to leave high tax states, and, additionally, legislators in high tax states must now think twice before voting to increase state taxes, since such increases will now have a magnified effect on local taxpayers–thus, the fed tax plan sticks its hand directly into the state pursue and state legislative policy; (2) by magnifiying the effect of state and local taxes, the new fed tax plan is helping to dictate where people live (ie, incentivizing a move to low tax states), which the federal govt shouldn’t get to do (at least not thru a tax policy)–rather, the states should be able to continue their taxing experiments in this democracy without undue interference from the feds; (3) the new fed tax plan creates potential havoc and fundamental fairness problems for certain individuals–for example, suppose the federal income tax at the highest bracket is 51% (in fact its been even higher in the past), and suppose New York also wanted to tax the highest income bracket at 51% (to pay for, say, increased anti-terrorism security)–under the new fed tax plan, a high income earner living in New York could actually be *negative* 2% on the year, because there’d be no available SALT deductions–if that sounds unfair to you, next ask which government should yield, the fed or the state? Anyway, there are even more issues that have nothing to do with invidious motive, but I’m just a tree falling in the forest…

  • john clark

    How about the Commerce Clause? These changes have the effect of economically disadvantaging certain states. Higher real taxes paid by citizens of targeted states will harm the economic health of those areas, using US tax code to encourage migration to low tax states and adding Republican reps to those states, economic gerrymandering

    Ironic that the states that helped fund the rebuilding of the south and western development are now the targets of economic retribution voted into tax law by representatives of those states (California ecluded!)

  • Roy Bryant

    Wow! No “reasoning” is too silly for extreme leftists when trying to explain asinine destructive public policy!

  • Roy Bryant

    So, you had some kind of ridiculous reason for not liking the truth I told. Try this another way: The politicians in the various states have the right to impose common-sense, helpful, beneficial levels of taxation on their citizens. They also have the right to impose levels of taxation that are destructive to the economy, and harmful to the welfare of the citizenry. Elected officials at the national level have the same right. You are saying that when our national congress imposes common-sense, beneficial, helpful tax policies that just naturally clash with economy-destroying tax policies imposed by some state legislatures, the courts should be able to step in and tell the national legislature that such tax policies can’t be imposed, because the various states would suffer or benefit unevenly, although that uneven distribution of suffering and benefits is the natural result of good or not-so-good tax policies imposed in the various states? Is that about right? You need to explain yourself vastly-better that anything you have already said. The founders would be very surprised that you want to give that power to the courts, which they saw as the least-powerful branch. Is your next contention that the states have no prerogatives at all, and only the national legislature has the power to establish taxing power at the local levels?

  • Scott McGowan

    Your argument fails for a few reasons. 1. The code follows equal protection. Whether your state has oppressive state taxes is up to the state. My state, Connecticut, could just reduce that burden if we could actually elect non tax and spend liberals. 2. The tax already shows preferences for different people. For example, there is a deference already shown for people who are married and people with children. I fall into neither category. So, as an unmarried, childless homeowner making a decent income in Connecticut I’m getting “screwed.” However, I still don’t have a problem with the changes in the code. If anything why do CT residents get a break while other state’s residents do not under the old scheme?

  • cookin128

    The Supreme Court has read the Congress tax power very broadly. Let’s not forget that’s how the individual mandate was saved even though it was not considered a tax by Congress or labeled as such in the statute. (so much for “textualism”)

  • First Officer

    Are we sure states, and the federal government aren’t legally persons? After all, we can sue them.