Case Study #4: The Deduction of State and Local Income Taxes or General Sales Taxes
The federal individual income tax code permits taxpayers who itemize to claim a deduction for their state and local income taxes or general sales taxes. However, the deduction is controversial. Two common criticisms are that it is mostly claimed by upper-income taxpayers, and that it softens people’s opposition to high taxes and wasteful spending by state and local governments because some of those taxes can be written off at the federal level. Two defenses of the deduction are that it better measures people’s incomes, recognizing that some of their income has been transferred to others, and that it provides state and local governments with an indirect subsidy that helps them to fund their operations. Nevertheless, the purpose of this case study is not to discuss the merits or demerits of the deduction but is simply to examine the growth effects if the deduction were repealed.