Eliminating the deductibility of state and local taxes is a possible offset to lowering tax rates. Jared Walczak explains how the deduction encourages bigger government at the state level
“Just as the state and local tax deduction disproportionately favors wealthier taxpayers, it also benefits states which combine high incomes and high-tax environments. Reliance on the deduction varies widely: the average value of the state and local deduction as a percentage of AGI in the ten states with the highest reliance on the deductions is 6.09 percent, whereas it is only 3.81 percent in the bottom ten states. In New York, the deduction is worth 9.1 percent of AGI; the median across all states is just under 4.5 percent. More staggering, though, is the fact that just six states—California, New York, New Jersey, Illinois, Texas, and Pennsylvania—claim more than half of the value of all state and local tax deductions nationwide, with California alone responsible for 19.6 percent of the national tax expenditure cost.
“To some degree, this is a function of population. Any tax provision, no matter how neutral its application, will flow more to states with higher populations. The state and local tax deduction, however, expressly favors higher-income earners and state and local governments which impose above-average tax burdens. The deduction’s effect is for lower- and middle-income taxpayers to subsidize more generous spending in wealthier states like California, New York, and New Jersey, reducing the felt cost of higher taxes in those states. As the Urban-Brookings Tax Policy Center has observed, state and local governments ‘are able to raise revenues from deductible state and local taxes that exceed the net cost to taxpayers of paying those taxes, in effect allowing those jurisdictions to export a portion of their tax burden to the rest of the nation.’” [Internal citations omitted.] [Tax Foundation]
