A few stories are in the news today about the state and local tax deduction, a provision of the federal income 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. system that allows taxpayers who itemize to deduct some of their state and local taxes paid from their federal taxable income, lowering their total tax burden.
This deduction is really bad policy for about a dozen reasons that my colleague Jared Walczak laid out in a fantastic paper released earlier this year. However, one of the reasons this policy seems to stick around is that a lot of folks think that the deduction is in place to protect against double taxation. Interest groups that want the policy retained for whatever reason stoke the flames of this misconception—for example, a coalition called “Americans Against Double TaxationDouble taxation is when taxes are paid twice on the same dollar of income, regardless of whether that’s corporate or individual income. ” launched just today.
The problem is that their assertion is bunk. Jared’s findings:
In a federal system, moreover, individuals receive services from federal, state, and municipal governments. Each layer of government can be viewed as providing its own package of services, which one would expect to be “priced” separately. When two taxes levied by a single government, or similar types of governments (for instance, multiple states), fall disproportionately upon the same income or economic activity, this represents a clear case of double taxation. When different levels of governments levy taxes for discrete sets of services, the rationale for a deduction for taxes paid is far weaker.
Or as my colleague Kyle Pomerleau notes in less than 140 characters:
Guess what, guys. If you get two sets of benefits, from two levels of government, you are not being double taxed.https://t.co/frPSRJJc4i pic.twitter.com/DTTOopcOHm
— Kyle Pomerleau (@kpomerleau) September 21, 2017
Imagine if we applied this faulty line of thinking to other tax types. Most states have both state and local sales taxes. What if we demanded that we be allowed to deduct our local sales taxes paid against our state tax liability on the same transaction? What if we demanded the ability to deduct our municipal property tax payments from our county 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. assessed value? We don’t do either of these things, because the revenue is going to different government entities to pay for different things.
Repealing 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. carve-out will be an important part of pro-growth tax reform. Eliminating the deduction would free up $1.8 trillion to use for lowering rates across the board. Special interest groups will want you to think this deduction protects you against double taxation. Don’t fall for it.
For more resources on removing actual double taxation from the tax code, browse our research on the estate tax, capital gains and dividend taxes, and gross receipts taxes.
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