I’m very glad to see Eli Lehrer back an end to the state and local tax exemption:

Small-government conservatives should dislike the current deductions because they encourage higher government spending at the state and local level. Already high tax jurisdictions can raise taxes knowing that the feds will, for all intents and purposes, pick up part of the tab. Lower tax jurisdictions have less pressure to avoid raising their own taxes. Without deductibility, states would have more pressure to cut spending rather than raising taxes. Since lower tax states, on balance, tend to be more conservative, much of the Republican base would see only minimal consequences from the end of deductibility. Over time, total tax burden might even fall if deductibility ended.

Ending the state and local tax exemption is a central part of Robert Stein’s family-friendly tax reform, published in National Affairs earlier this year.

Overall, the plan is designed to be revenue neutral — and yet most taxpayers without children will pay a little bit less in taxes, while middle- class families with children under 18 years of age will pay substantially less. So who pays more? Primarily high-income workers, but also upper-middle-class taxpayers who do not have children in the home (either because they have decided not to raise children at all, or because their children have already turned 18).
To be blunt, the plan is a tax hike on the rich and makes the tax code even more progressive than it is today. Given the loss of the state and local tax deduction, the tax hike will be particularly acute for high earners from high-tax states. And although the top income-tax rate would be capped at 35%, that rate would kick in at lower income levels than it does today. The result would be a marginal tax-rate hike — and a corresponding weakening of work incentives — for many workers who today find themselves in the 25%, 28%, and 33% brackets.

Stein’s proposal isn’t my tax reform of choice. I remain sympathetic to Michael Graetz’s Competitive Tax Plan. But I do think that eliminating the state and local tax deduction is an important step.

Matt Yglesias considers the politics of the proposal:

This is a regressive exemption, that primarily benefits rich residents of high-tax (i.e., liberal) states like New York. So in theory resentment-fueled rightwingers might back getting rid of it. At a minimum, any move to do this would put the Chuck Schumers of the world in an awkward position, since it’s clearly a “good for New York” provision of the tax code irrespective of its overall merits. Meanwhile, actual jurisdiction over tax law is headed up by Senator Max Baucus of Montana for whom it seems to me that curtailing this deduction should be a no-brainer.

I think Matt’s model of how this would play out politically isn’t quite right. Blue-state conservatives will bitterly oppose this measure, despite the fact that it will create powerful political pressure to reduce the tax and spending burden in these states over the long term. And I don’t think Senator Schumer would find opposing this measure particularly awkward. The Democrats have proven quite willing to defend the interests of their upper-middle-income constituents, hence the decision to make $200K or $250K the upper bound of their notional middle class. Moreover, public sector unions would resist this measure with great energy, and my understanding is that Democratic politicians pay pretty close attention to what public sector unions have to say. At the last Democratic National Convention, if I recall correctly, more delegates were public school teachers than Californians, let alone public employees.

These days, my mental model is that the major political movements most faithfully represent two privileged classes. The right represent a large number of near-rich voters. The left represent public sector employees. Both groups have maximal demands, and a key question is whether you consider the maximal demands of one group or the other to be more harmful to the common good.

A better approach, in my view, is to tie ending the state and local tax deduction to a broader reordering of state and federal roles, e.g., let’s federalize Medicaid and use the revenue from ending the state and local tax deduction to help close the resulting federal revenue gap. This, of course, would be a very difficult two-step.