What Could a Partial Repeal of the State and Local Tax Deduction Look Like?

October 12, 2017

Late last month the “Big Six” released their tax plan which called for the elimination of several itemized deductions. While lacking specifics on which itemized deductions would be eliminated, it has been strongly hinted that cutting the state and local tax deduction is on the table. Eliminating the state and local tax deduction would be used to fund other tax reform priorities, such as cutting the corporate income tax rate and expanding the Child Tax Credit. For more in-depth information on the state and local tax deduction and its incidence, my colleague Jared Walczak has recently written a great primer.

Today, The Wall Street Journal reported that lawmakers are considering a plan to preserve the state and local tax deduction for most taxpayers while eliminating it for high-income taxpayers. What constitutes a high-income taxpayer is somewhat subjective and the income level at which you cap the state and local deduction will impact how much it raises.

One possibility is that lawmakers subject the state and local tax deduction to a $400,000 AGI cap ($800,000 AGI for married couples). This means that taxpayers can only take the deduction if their incomes are under this threshold.

We estimate that this cap will raise an additional $481 billion over the next ten years on a static basis. Economic effects would be negligible, with a GDP change of -0.04% over the next ten years. The only income group which would see a change in their after-tax income would be the top 1%, with an average reduction of -1.8%.

An income-based cap on the state and local deduction would certainly limit potential tax increases to high-income taxpayers. However, the trade-off is that it would raise about one-quarter the revenue as full repeal.

Change in Federal Revenue, 2017-2026
Static   $481 billion
Dynamic   $469 billion
Economic Effects Compared to Current Law
GDP change            -0.04%
Source: Tax Foundation, Taxes and Growth Model (March 2017 version)
Static and Dynamic Distributional Analysis
Changes in After-Tax Incomes
Income Group Static Dynamic
0% to 20% 0.0% 0.0%
20% to 40% 0.0% 0.0%
40% to 60% 0.0% 0.0%
60% to 80% 0.0% 0.0%
80% to 100% -0.6% -0.6%
80% to 90% 0.0% 0.0%
90% to 95% 0.0% 0.0%
95% to 99% 0.0% 0.0%
99% to 100% -1.8% -1.9%
TOTAL -0.3% -0.4%

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