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Editor: Paul L. Caron, Dean
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Wednesday, November 8, 2017

Shobe: The GOP Gets A Big Part Of Its Tax Plan Backward: State, But Not Local, Taxes Should Be Deductible

Tax Cuts And Jobs ActWashington Post op-ed:  The GOP Gets a Big Part Of Its Tax Plan Backward, by Gladriel Shobe (BYU):

The House Republican tax plan proposes repealing much of the state and local tax deduction, allowing individuals to deduct up to $10,000 of local property taxes but eliminating the rest of the deduction. This gets sound tax policy precisely backward. Smart tax reform would allow taxpayers to deduct what they pay to states — and would end the deduction for local taxes.

The treatment of the state and local tax deduction is one of the central points of contention in the tax-reform debate. President Trump and most Republicans want to repeal or modify the deduction, which could raise more than $1 trillion over the next decade. Republican and Democratic members of Congress from high-tax states are protesting any repeal because it would disproportionately harm their constituents.

But the reality of the distribution of benefits and costs of the state and local tax deduction is more complicated than high-tax (mostly blue) states vs. low-tax (mostly red) states. As the House Republican tax plan implicitly acknowledges, the state and local tax deduction in fact combines two very different deductions: a state deduction for state income taxes (or, much more infrequently, sales taxes) and a local deduction for property taxes. When looked at this way, the issue is both a high-tax state vs. low-tax state issue and a rich-locality vs. poor-locality issue, with the federal government providing a disproportionate subsidy to high-tax states and high-tax localities. ...

[S]mart tax policy would allow taxpayers to deduct the cost of state income taxes while eliminating the deduction for local property taxes. As it happens, because local taxes account for approximately half the overall deduction, this change would raise approximately $500 billion over the next decade.

Instead, House Republicans propose doing just the opposite. By retaining deductibility for local property taxes, their approach would continue to disproportionately subsidize wealthy, country-club-like localities, albeit to a smaller degree for the wealthiest towns and cities because of the $10,000 cap. And by eliminating deductibility for state taxes, the tax plan would end the federal government’s subsidy for state governments, which spend a significant percentage of their revenue on redistributive programs

http://taxprof.typepad.com/taxprof_blog/2017/11/shobe-the-gop-gets-a-big-part-of-its-tax-plan-backward-state-but-not-local-taxes-should-be-deductibl-1.html

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Comments

But then, the goal isn't good tax policy, is it?

Posted by: Publius Novus | Nov 9, 2017 6:11:01 AM

The best thing about this tax bill is that it has true tax simplification by reducing the use of itemized deductions, saving lots of record-keeping and making enforcement much easier. One other example of this with state income tax deductions is that currently if you deduct your state income tax but the state revises your tax return, you end up having to itemize the extra tax you pay, or, worse, having to add the refund back to your federal income the next year. Just get rid of it!

Posted by: Eric Rasmusen | Nov 9, 2017 8:12:52 AM