Who Benefits From the State and Local Tax Deduction?

March 16, 2017

Tax reform proposals from the House GOP and Trump administration would either eliminate or cap the state and local tax deduction, which allows filers who itemize to deduct taxes paid to state and local governments on their federal returns. A new Tax Foundation report shows that the benefits of the tax break go primarily to wealthier filers, creating a federal subsidy for high-income earners in high-tax states.

Tax Foundation Policy Analyst Jared Walczak, the report’s author, found that the deduction–which costs the federal government approximately $100 billion in annual revenue–mainly benefits filers earning more than $100,000. New York and California alone account for nearly one-third of the total deduction’s total value.

Key Findings

  • Taxpayers who itemize deductions on their federal income tax are permitted to deduct certain taxes paid to state and local governments from their gross income for federal income tax liability purposes.
  • State and local tax deductibility would be repealed under the House Republican Blueprint, and capped—along with other itemized deductions—under the campaign plan put forward by President Donald Trump.
  • The state and local tax deduction disproportionately benefits high-income taxpayers, with more than 88 percent of the benefit flowing to those with incomes in excess of $100,000.
  • The deduction favors high-income, high-tax states like California and New York, which together receive nearly one-third of the deduction’s total value nationwide. Six states—California, New York, New Jersey, Illinois, Texas, and Pennsylvania—claim more than half of the value of the deduction.
  • The state and local tax deduction in New York and California represents 9.1 and 7.9 percent of adjusted gross income respectively, compared to a median of 4.5 percent.
  • The deduction reduces the cost of state and local government expenditures, particularly in high-income areas, with lower-income states and regions subsidizing higher-income, higher-tax jurisdictions.

Walczak writes that the deduction has become increasingly costly and could be an attractive “pay-for” to provide a revenue offset to rate reductions or other reforms. The House Republican tax plan would repeal the provision outright, while the campaign proposal of President Donald Trump would cap itemized deductions, which would limit the value of the deduction. Limiting or ending the deduction for state and local taxes paid offers a rare convergence of the goals of both the left and the right by eliminating a regressive tax provision and using it to offset the cost of pro-growth reform.

Click here to view the full report.

For more information, contact:

Colby Pastre
Marketing Manager
Tax Foundation

The Tax Foundation is the nation’s leading independent tax policy research organization. Since 1937, our principled research, insightful analysis, and engaged experts have informed smarter tax policy at the federal, state, and local levels.