Individuals working in the entertainment and media industries will feel the pinch in home-states like California and New York.

Last month, a federal judge dismissed a lawsuit against the Treasury Department brought by New York, Connecticut, Maryland, and New Jersey that challenged the constitutionality of the Tax Cuts and Jobs Act’s limitation on the federal deduction for state and local taxes paid. The TCJA imposed a $10,000 upper limit, known as the SALT Cap, to the amount individuals can deduct on their federal tax return for state and local taxes. The SALT Cap applies for tax years 2018 through 2025.

Residents of states with higher state individual income tax rates, such as California and New York, have felt the brunt of this change. Consequently, the industries predominantly based in these states such as entertainment and media have been particularly hit. Moreover, the SALT Cap limits both state tax and property tax deductions to $10,000 combined, compounding the issue for California residents, where real estate prices have increased dramatically. Not surprisingly, California saw the largest outflow of domestic residents of all states in 2018. New York came in at third. And in case we were unsure whether tax considerations caused the exodus, Florida, a state with no state income tax, received the most movers.

The lawsuit dismissed on Monday argued that the SALT Cap was unconstitutional specifically because Congress knew limiting the individual state and local tax deduction would disproportionately harm states like California and their residents. But the federal judge in New York dismissed this claim, holding that Congress could enact the SALT Cap under its broad tax power. While the lawsuit directly challenging the constitutionality of the SALT Cap created one avenue to defeat it, states have also considered or implemented other “workarounds” that would allow their residents to continue writing off their state and local taxes.

California considered creating a charitable fund that would allow residents to contribute to the charitable trust in lieu of paying state income taxes. The result, conceptually, was that these payments would be deductible on residents’ federal returns as charitable contributions. But the IRS shot this plan down in final regulations issued in June. Under the regulations, the federal charitable deduction from a contribution to these funds must be lowered by any state income tax credits received. In July, New Jersey, New York, and Connecticut filed a lawsuit that hopes to have these regulations struck down as unlawful. But this lawsuit is pending, and the California bill that would create the charitable fund continues to be stuck in the legislative process.

Connecticut and New York have taken a different “workaround” approach. These states have enacted optional business-level state taxes that provide for state tax credits to the individuals who elect into the program. The SALT Cap has no effect on businesses deducting their state and local taxes paid. So far, the IRS has remained noticeably silent on these programs. But the American Institute of Certified Public Accountants has released a statement outlining the many operational, administrative, and legal issues that these programs create.

California has yet to enact a similar “workaround” involving elective entity-level taxes. And it remains to be seen whether the July lawsuit will invalidate the IRS regulations and lead to California following through with establishment of the charitable fund. The state has yet to consider any other “workarounds.” So, in the meantime, California residents are stuck paying the high state income and property taxes to which they have become accustomed. And since the enactment of the TCJA, they will continue to see an increase in their federal tax bill, to boot. Stay tuned.

Special thanks to Sam Djahanbani for contributing to this post.