The Corner

Politics & Policy

Getting Rid of State and Local Tax Deductions

There is a lot to say about the Republican leaders’ tax framework. Overall, I am particularly pleased with the reforms to the corporate tax system, the tax changes for small businesses and S-corps; the repeal of the alternative minimum tax and the death tax, and the elimination of some of the special interest tax exemptions that make the tax code unfair and complicated. There are a few things I don’t like as much–and some I frankly dislike (I am looking at you expansion of the child tax credit)– but I will wait a little before I start listing them all. 

Even though it doesn’t say it explicitly, it seems that the plan would eliminate the state and local tax deductions. It will be politically difficult but it is the right thing to do. I’m all for people keeping more of their income, but this exemption leads to bad policy by state and local government. It allows state and local politicians to raise taxes without upsetting voters as much as they should be because this additional burden can be deducted from their federal tax bill. It also makes taxpayers less vigilant about policy changes and the spending behaviors of their lawmakers, because they don’t have to pay the full price of their states’ budgets in taxes.

High-tax and big-spender states won’t like it. California and New York in particular will feel the impact of this tax reform because they will have to shoulder more of the tax burden of the government they claim they want. 

Finally, as you know, I am no supporter of revenue neutrality, but I am fully behind the idea of getting rid of bad tax deductions to pay for good tax reform, when it makes the tax code fairer, simpler, and less favorable to special interests and big government policies. This is one of those instances.

Now, Republicans need to pass a budget to unlock the tax reforms in the plan. No budget, no fundamental reform.

Veronique de Rugy is a senior research fellow at the Mercatus Center at George Mason University.

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