Eliminating Federal Deductibility of State and Local Taxes
There are philosophical reasons to support or oppose the deductibility of state and local taxes when calculating federal income tax liability. If one characterizes state and local taxes as a fee for services (Ms Warren's roads, schools and police) then they should not be deductible. If one characterizes them as lost income, then they should - to avoid, for example, paying tax on tax. (See for example this 2007 CRS report: PDF.)
The historical arguments go both ways. Deductibility dates from the original 1913 Act. But it has been constantly tinkered with.
Fiscally the change could net the Federal government almost $100 billion per annum, or less than a month's worth of borrowing. So, good or bad again, depending on your perspective. The burden would fall mainly on high-income taxpayers in high state tax states.
Which brings me to perhaps the best reason to support the change - it would end the implicit subsidy of high-tax states by low-tax states. Below a graph of losers (darker) and winners (lighter) (from a 2008 CBO paper: PDF). Remind you of anything?
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Aug '10
Re: Eliminating Federal Deductibility of State and Local Taxes
Combine with this idea and the need for simplification and rate stabilization at a lower number all become painfully obvious. But the legions of trust attorneys and accountants, add in the bureaucrats and tax agents, will start pouring money into lobbying and campaigns and we'll see a replay of the trial lawyers and the pushback against the limiting of damages playbook.
Asking a group of lawyers (Congress) to alter their industry lifeblood is like asking a cow for steak sauce.
Re: Eliminating Federal Deductibility of State and Local Taxes
Yes, yes, you have it all right. But for reasons of self-interest, I cannot support such preposterous idea. California is expensive enough as it is.
Re: Eliminating Federal Deductibility of State and Local Taxes
We should get rid of all personal deductions and all subsidies. They do nothing but produce distortions in the market. Simplicity and neutrality should be the rule.
Jul '10
Re: Eliminating Federal Deductibility of State and Local Taxes
But, but...then my elected officials would have no tax breaks to sell to big interests!!!
Anyone who has ever worked with a financial advisor is in no way surprised that 1) Congress considers every dollar in the world to be theirs and we receive the occasional use thereof as an act of extraordinary largesse on their part and 2) the perverse incentives riddling the system stand as conclusive evidence that Congress is not just stupid, but a mean stupid.
Sep '10
Re: Eliminating Federal Deductibility of State and Local Taxes
The tax system is a symptom of a larger problem. The government is too big, too bloated, too intrusive and too expensive.
Re: Eliminating Federal Deductibility of State and Local Taxes
True.
Sep '11
Re: Eliminating Federal Deductibility of State and Local Taxes
Why not rent instead of purchasing a house? I would think the deduction is the main reason most people buy.
Re: Eliminating Federal Deductibility of State and Local Taxes
BradnSA
Why not rent instead of purchasing a house? I would think the deduction is the main reason most people buy. · Sep 28 at 1:14pm
Really? I thought that people bought a house because a) it was always thought to be an instrument of long-term investment (before the housing market crash, that is); and b) because people like owning stuff so that they can create a space that suits their needs and reflects their tastes.
I'm a renter now out of necessity, but I'd like to own a house someday not for the deduction, but so that I can plant a garden, remodel a kitchen that meets my requirements, paint the walls, and eventually have a home that meets my family's needs.
Sep '11
Re: Eliminating Federal Deductibility of State and Local Taxes
Diane Ellis, Ed.
Really? I thought that people bought a house because a) it was always thought to be an instrument of long-term investment (before the housing market crash, that is); and b) because people like owning stuff so that they can create a space that suits their needs and reflects their tastes.
I'm a renter now out of necessity, but I'd like to own a house someday not for the deduction, but so that I can plant a garden, remodel a kitchen that meets my requirements, paint the walls, and eventually have a home that meets my family's needs. · Sep 28 at 1:32pm
Get your HGTV on. Most renters will be more than happy to let you make reasonable improvements.
I get thousands back in deductions that I could save if I just rented (without the deductions), and have just as nice a place as I live in now (as a matter of fact, a lot of rentals on my block).
Edited on Sep 28, 2011 at 1:56pmMar '11
Re: Eliminating Federal Deductibility of State and Local Taxes
There needs to be a decoupling of credits from the tax system. The earned income credit, child credits, energy, education and all the other credits do nothing but obfuscate the purpose of the tax code, making it a de facto welfare program. Admittedly, it's easy to administer these credits as part of the annual obligation of filing, but it's too tempting a target for corruption, and distorts the true cost of government. I'm in favor of the Fair Tax, if for no other reason than every time a purchase is made, the receipt is a constant reminder of that cost. Perhaps if people were constantly confronted with that cost, there'd start to be a bigger push back on government programs.
Sep '11
Re: Eliminating Federal Deductibility of State and Local Taxes
The argument in favor of maintaining the deductibility of state taxes is that the government should only be allowed to take so much, combined, and nothing more.
If the Federal government doesn't have the authority to stop out of control, tax and spend States, the least it can do is reduce its own share of the taxes paid by those unfortunate enough to live in those states.
This is a good thing if you believe that the States should take more responsibility and power, and the Feds should tax and spend less.
Just don't tell me that "all" deductions and credits must go, then turn around and make exceptions for things like the child tax credit. The government should not incentivize parenthood, because while good parents will do it regardless anyway, irresponsible parents will do it only for the money.
May '11
Re: Eliminating Federal Deductibility of State and Local Taxes
Illiniguy comes closest to the bulls-eye so far. The problem with the tax code is that it is a gajillion page tax code. Take a look again at Cain's 9-9-9 plan. Simple, straight forward, fair but most of all it cuts out the ability to buy votes.
BTW. The mortgage deduction was a huge factor in pushing the housing bubble. I heard time and time again, when talking about the Flat tax or Fair Tax, "What about my mortgage deduction?" People just couldn't get around the idea of paying less tax even though there was no mortgage deduction.
Mar '11
Re: Eliminating Federal Deductibility of State and Local Taxes
CPA to Airline Pilot Client (my typical client): I see you've started raising pigs.
Airline Pilot: Yep!
CPA: I see you buy the pigs for $40, put $60 of feed in them and then sell them a year later for $100. That's not a good business model.
Airline Pilot: For a CPA, you aren't too bright. I get tax free use of the pig for a whole year!
Jan '11
Re: Eliminating Federal Deductibility of State and Local Taxes
Silly question, I suppose, but just as a thought exercise, what if there were no coercive federal tax laws - at all?
Would people willingly assume their individual responsibility to finance the national government - according to, say, what the government says it would voluntarily require of them to sustain itself, and who (in the broadest sense) would be most likely to pony up?
Stimulates some interesting suppositions about what citizens know of, and understand about, their government, and how they value it, I think. It is fundamentally true that actions have consequences, but do many, most, or few citizens understand that?
Jan '11
Re: Eliminating Federal Deductibility of State and Local Taxes
I like the idea of a consumption tax in that it rewards saving & investment vs. consupmtion but I just think there would be too much lobbying for carve-outs and exemptions - our politicians are simply too corrupt and cannot be trusted.
I don't think that gov't bonds should be tax free as well, I consider that price descrimination - not sure why that's never been challeneged in court.
Flat tax, one rate, constitutional ammendment that specifies rate, 2/3 majority to raise or lower. Deficit spending would force temporary increase in rate until back in balance. This would inject certainty into market, business & personal finance and would dramtically alter the balance of power back towards the citizen/taxpayer.
Nov '10
Re: Eliminating Federal Deductibility of State and Local Taxes
Diane Ellis, Ed.
BradnSA
Why not rent instead of purchasing a house? I would think the deduction is the main reason most people buy.
Really? I thought that people bought a house because a) it was always thought to be an instrument of long-term investment (before the housing market crash, that is); and b) because people like owning stuff so that they can create a space that suits their needs and reflects their tastes.
Diane, answer B is most certainly correct.
Sep '10
Re: Eliminating Federal Deductibility of State and Local Taxes
An interesting thought exercise, but, still seems to ceed to much of the argument to the revenue side. Unless and until I see significant decreases in real spending, I don't want to hear about revenue. The spending is the problem.