Alex Adrianson of the Heritage Foundation’s “Insider Online” blog highlights information that should interest all American taxpayers, especially those who live in low-tax states.
The federal deduction for state and local taxes is a handout to high-tax states. It lets them raise their taxes higher than would otherwise be politically sustainable by shifting that tax burden to taxpayers in other states—who don’t vote for the lawmakers who raised the taxes.
What if the federal government eliminated that deduction and commensurately lowered federal taxes for everybody? According to a new analysis by Rachel Greszler and Kevin Dayaratna, federal income tax rates could be reduced by as much 12.5 percent without reducing federal revenue. Further, they calculate that at least 70 percent of taxpayers would face lower combined federal and state taxes because they do not itemize their deductions.
Just 10 states account for 62 percent of the value of the deduction, and the deduction primarily benefits high-income earners. But even taxpayers in those high-tax states may be better off without the deduction. If taxpayers were unable to deduct their state and local taxes, they would start demanding a dollars’ worth of state services for every dollar they paid in state taxes. Lawmakers would then face pressure to trim state budgets and cut taxes to make voters happy.
