by Dr. Roy Cordato
Senior Economist, Emeritas
I have made my views on the Republican’s plan to eliminate or partially eliminate the deductibility of state income taxes and property taxes from federal taxable income. My case can be found here and here. This issue paper published by the Heritage Foundation sums up the Republican argument. It rests primarily on the fact that the deduction encourages states to have higher taxes. (I have addressed this issue in the essays linked above.) By-the-way, this is pretty much the only argument that is being presented by the plan’s Republican supporters. This is because there is no argument to be made from the perspective economic growth.
I think the Heritage/Republican case becomes interesting if one thinks beyond the argument they are making in terms of reforming the current income tax. The fact is, the arguments they make would also apply to state sales taxes and, if it were ever implemented, a national sales tax, for example the FAIR Tax. According to their logic, state sales taxes should be applied to both local property taxes and even local income taxes because by not doing so it encourages localities to have higher taxes. And, as noted, if at the federal level we ever moved to a sales tax, every argument they currently are making would suggest that that sales tax should be applied to all state and local taxes. In other words, when you pay your property tax, the sales tax would be applied to the amount of your tax. I’m curious, would Heritage and other supporters of this tax change also advocate for these policies. And if not, why not?