State and Local

12.03.12

Not All Deductions Are Created Equal

Philip Klein urges Republicans to endorse ending the state and local taxes deduction:

The deduction also disproportionately benefits taxpayers with higher incomes. The CBO has written that, “the deduction largely benefits wealthier localities, where many taxpayers itemize, are in the upper income tax brackets, and enjoy more abundant state and local government services. Because the value of an additional dollar of itemized deductions increases with the marginal tax rate (the rate on the last dollar of income), the deductions are worth more to taxpayers in higher income tax brackets than they are to those in lower income brackets.” In 2009, according to the CBO, those who earned over $100,000 enjoyed 73 percent of the tax benefit from this deduction. An older 2007 study by the Tax Policy Center found that 53 percent of the tax hike associated with repealing the reduction would fall on those earning over $200,000.

If this deduction were eliminated, it would trigger an anti-tax revolt at the state level. Residents of high-tax states would put more pressure on state lawmakers to cut taxes. State lawmakers would now have to weigh more heavily the economic consequences of increasing taxes, because they’d be competing more fairly with lower-tax jurisdictions. To keep tax rates lower and remain competitive, they would have to consider ways to reduce spending.

Jordan Bloom nods, but explicity recognizes this won't be happening:

Talk of eliminating it is likely to remain talk, though, especially with Republicans prepping a ‘doomsday‘ do-nothing plan, and if we’re to believe the legislators forecasting a headlong dive off the cliff. Still, it wouldn’t hurt for Republicans to offer it.