THE DEDUCTIBILITY OF STATE AND LOCAL TAXES

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Abstract
The paper analyzes the much-debated tax reform proposal to eliminate the deductibility of state-local taxes. This change would appear to hurt high income itemizers and not low income non-itemizers, but for two separate trickle down effects. One involves the possibility that state-local spending will decline as a result of the higher effective tax price; the other the possibility that rich itemizers will leave low income communities. The paper analyzes both effects with micro data on taxes, incomes, and demand for public spending in various communities, and finds them, and the losses to low income people from an elimination of deductibility, to be relatively modest. It also suggests some partial elimination provisions that seem attractive on equity and efficiency grounds.