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Elimination of State and Local Tax Deduction Possible

2 min readBy: Andrew Lundeen

Reuters reports that the Ways and Means CommitteeThe Committee on Ways and Means, more commonly referred to as the House Ways and Means Committee, is one of 29 U.S. House of Representative committees and is the chief tax-writing committee in the U.S. The House Ways and Means Committee has jurisdiction over all bills relating to taxes and other revenue generation, as well as spending programs like Social Security, Medicare, and unemployment insurance, among others. plans to include limits to the state and local taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. es paid deductions as part of the tax code overhaul.

“The deduction will be significantly curtailed or axed in any proposal put forward by Camp, said an aide who works for him,” according to the Reuters article.

We have weighed in on the issue of federal deductions of state and local tax previously. This past spring, Scott Hodge, the Tax Foundation president, testified before the Ways and Means Committee that the state and local tax deductionA tax deduction is a provision that reduces taxable income. A standard deduction is a single deduction at a fixed amount. Itemized deductions are popular among higher-income taxpayers who often have significant deductible expenses, such as state and local taxes paid, mortgage interest, and charitable contributions. s have the ability to influence the behavior of state and local governments:

“In the same way that the mortgage interest deductionThe mortgage interest deduction is an itemized deduction for interest paid on home mortgages. It reduces households’ taxable incomes and, consequently, their total taxes paid. The Tax Cuts and Jobs Act (TCJA) reduced the amount of principal and limited the types of loans that qualify for the deduction. may encourage some families to purchase a much larger home than they otherwise could afford, the taxes-paid deduction and the municipal bond exemption encourage many states to tax more, spend more, and borrow more than they otherwise would.”

In his testimony, he compiled a list of the key effects these provision have on state and local government. The evidence suggests the state and local tax provisions in the federal tax code:

  • Increase state reliance on deductible taxes;
  • Lead to higher state and local tax burdens;
  • Encourage higher state and local spending;
  • Encourage higher state and local debt; and
  • Disproportionately benefit high-income states and high-income taxpayers at the expense of low-income states and low-income taxpayers.

The chart below shows that states with the highest amount of taxes-paid deductions also have significantly higher levels of state and local government spending. In addition, 55 percent of the benefits from the state and local income, sales, and personal property taxA property tax is primarily levied on immovable property like land and buildings, as well as on tangible personal property that is movable, like vehicles and equipment. Property taxes are the single largest source of state and local revenue in the U.S. and help fund schools, roads, police, and other services. deductions accrue to taxpayers with incomes above $200,000.

Furthermore, our Taxes and Growth Model finds that if Congress were to eliminate all state and local provisions in the federal code and use the revenue to cut rates across the board we would see a $41.2 billion increase in GDP.

More recently, we took a look at the economic effects of eliminating just the deduction for state and local income or general sales. We found that eliminating just this provision and using the revenue to cut taxes to maintain revenue neutrality would increase GDP by $24.4 billion and add the equivalent of 300,000 jobs.