Repeal the Federal Deduction for State Taxes

December 14, 2012


National Review’s editors explain a creative potential solution to the “fiscal cliff” impasse:  Eliminate the federal deduction for state and local taxes.  Currently people can deduct, on their federal income taxes, the money they pay in state and local taxes; in effect, this forces taxpayers in small-government states to subsidize the big-government schemes of other states.  National Review:

Estimates suggest that eliminating this deduction would raise as much as $900 billion over ten years . . . . $900 billion would completely offset the estimated deficit for 2013. . . . As Reihan Salam points out, households in the $200,000-and-up range would pay an average of $5,166 more without the deduction, while those in the $30,000-to-$50,000 range would pay only $70 more.

A tax reform that more than clears the $800 billion mark, falls most heavily upon the wealthy, and has the support of many conservatives: You would think that the Democrats would be quick to embrace such a thing. But . . . the party’s house organ has editorialized against it. Writes the New York Times:

The theory behind the deduction was that the amount paid to states in taxes is not really part of an individual’s disposable income, because it is obligatory and, therefore, should not be taxed twice. Over time, the deduction has become the equivalent of a subsidy from the federal government to states that believe in a strong and active government. That may infuriate conservatives in low-tax states like Texas, who hate subsidizing states with different views of government’s role, but it’s actually a good thing for the country.

. . .

The Times mistakes correlation for causality, as it usually does when it suits the editors’ politics.

(Link in original.  Read the rest here.)

Here’s the New York Times editorial.  This has also been discussed in the following (in chronological order):

If you want a lot of government, you should be willing to pay for it. If you are not willing to pay for it, you should not enjoy the benefits.

4 Responses to “Repeal the Federal Deduction for State Taxes”

  1. Tevyeh Says:

    I agree wholeheartedly that the deduction for state *income* taxes should be nixed, but I’d hold off on getting rid of the deduction for home property taxes until the U.S. housing market recovers a little more. If the deduction for property taxes were suddenly yanked, the depressing effect this development would have on the housing market would be a serious blow to our present national economy. The same goes for the mortgage interest deduction.

    Of course, it’s probably a purely academic discussion. These deductions are popular, and therefore safe.

  2. Reed Says:

    Not so fast. Some states (I.e. NC) have relatively high state income taxes and receive very little redistribution per capita from the federal income tax, while others have no state income tax and get much, much more (Alaska’s the worst; Tennessee and others come to mind). Why wouldn’t you consider this a further subsidy to the states that rely more heavily on federal handouts than collecting state income taxes?

    • Tevyeh Says:

      Your argument may have merit if you can show a strong negative relationship between state income tax receipts and federal grants. You’d have to show that states effectively face a tradeoff between those two sources of revenue.

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