One of the most controversial aspects of federal tax reform has been the proposal to eliminate deductibility of state and local taxes. Some people may have a sense of de ja vu: “President Reagan’s tax reform proposal calls for the elimination of the deductibility of state and local taxes,” Daniel R. Feenberg and Harry S. Rosen wrote in a 1985 paper. “The President and his spokesmen have stated that this is one part of the proposal that is not negotiable.”
Feenberg and Rosen concluded:
we have shown that the trade of state and local deductibility in return for lower federal tax rates (in conjunction with other provisions of the President’s proposal) is a good deal for all income groups in virtually all states. If that is true, why is the idea so controversial?…
(a) People may not believe that federal marginal tax rates will stay at the levels in the President’s proposal….
(b) …Our figures indicate that for high income people, the change would on average be an increase of 23%, and in a state like New York, it would be almost double that. No one knows exactly how such an increase in tax prices would change voter behavior. Perhaps those who are against the proposal anticipate substantial pressure to lower state expenditures.
