One of Republicans’ stated aims on behalf of tax reform is that they want to make the tax code simpler and minimize the incentives it creates through deductions and credits.
At least in terms of state and local taxes, though, the House Republican tax proposal risks creating a new tax incentive. Under current law, households can deduct all their property taxes and either their state and local income taxes or their state and local sales taxes (whichever are greater). The House Republican proposal would remove the ability to deduct the income and sales taxes levied by state and local governments, and would cap the property-taxes deduction at $10,000.
This proposal, though, could bias the tax policies of state and local governments. Since income and sales taxes couldn’t be deducted but a certain amount of property taxes could be, states and local governments would have an incentive to fund more programs through property taxes; voters would feel less of a bite if property taxes were increased than if sales or income taxes were increased. (Currently, most state governments rely much more on income and sales taxes to fund their budgets — property taxes are mostly local — but that could change with different incentives.) Maybe there’s an argument to be made for prioritizing property taxes, but creating an incentive for property taxes runs afoul of the stated aim of making the tax code less interventionist.
Under the House proposal, fewer Americans would itemize their deductions because of an increase in the standard deduction and because of the elimination of various itemized deductions. So this distortion would be felt by fewer people. But it would still be a distortion.
If they insist on cutting state and local deductions, Republicans could remedy this situation in two ways: They could eliminate the property-tax deduction, or they could keep current policies for state and local deductions but cap the overall deduction. In the latter approach, households could still deduct their state and local income or sales taxes (whichever are higher) as well as their property taxes, up to some total amount. With suburban Republican in high-tax areas already anxious about the House plan, the GOP might find it politically easier to expand the capped deduction rather than to eliminate it entirely.
Compared to the other political dangers of the Republican tax plan (including the temporary nature of many of its benefits for working families), this local-taxation distortion is relatively minor. But that doesn’t mean it can’t be addressed.