Monday, November 19, 2018
Gladriel Shobe (BYU) presents Economic Segregation, Tax Reform, and the Local Tax Deduction at Loyola-L.A. today as part of its Tax Policy Colloquium Series hosted by Ellen Aprill and Katie Pratt:
Economic segregation has increased over the past half century. The trend of rich neighborhoods getting richer while poor neighborhoods get poorer is particularly concerning because it limits upward mobility for children and perpetuates intergenerational income inequality. Although scholars and governments have studied the effects and consequences of economic segregation, they have overlooked the connection between economic segregation and the federal deduction for local taxes.
This Article makes the novel argument that the local tax deduction rewards, and likely contributes to, economic segregation. It arrives at that conclusion by showing that the deduction is only available to the wealthy and that the deduction allows localities to charge higher taxes, and therefore provide better goods and services, than they could in the absence of the deduction. However, only relatively wealthy localities benefit from the deduction because only they have a critical mass of taxpayers who claim the deduction. This allows these wealthy localities to provide services at a cost of less than face value to their residents, which in turn allows them to raise their tax rates as a result of the deduction’s subsidy. This Article argues that the deduction’s subsidy for wealthy neighborhoods likely contributes to economic segregation because it provides an incentive for the wealthy to segregate into wealthy, subsidized neighborhoods over less segregated and less subsidized localities.
This Article’s analysis and arguments are particularly relevant in light of the recent Tax Cuts and Jobs Act, which controversially capped the state and local tax deduction at $10,000 starting in 2018. This Article steps back from the political contention surrounding the deduction to analyze it from a tax policy perspective in light of its effects on economic segregation. It argues that the $10,000 ceiling mitigates the incentives for economic segregation by reducing the deduction’s federal subsidy for wealthy neighborhoods, but that there are alternatives that would similarly reduce the deduction’s incentive for the wealthy to economically segregate but which would be better tax policy.
Commentators: Michelle Layser (Illinois), Kirk Stark (UCLA)