by Jeremy Horpedahl, Harrison Searles
Mercatus Center
March 12, 2014
Taxpayers are allowed to deduct state and local taxes from their federal taxable income. The main benefit of this deduction is to provide tax relief to taxpayers living in states with higher taxes. However, this benefit also points to the main cost of the deduction: it subsidizes higher taxes and spending at the local level, since taxpayers in those states will not feel the full burden of the taxes. Instead, the burden of these taxes is in some sense “exported” to taxpayers in other states. When discussing taxation in the United States, it is important to consider all levels of taxation because these tax levels affect each other. Removing the federal tax deduction for state and local taxes would make taxes more equitable throughout the nation. The removal of this deduction would also allow federal marginal tax rates to be cut across the board.

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