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One of the many reasons we need tax reform is that our current system encourages bad economic policy at the state level and subsidizes wealthy individuals.
You heard that right. The tax deductions for state and local income taxes and for municipal bond interest function as subsidies for states that have high taxes and lots of debt. They also give huge benefits to the wealthy.
You might say that’s grossly unfair—and you’d be quite right.
A forthcoming analysis from The Heritage Foundation will show that these state and local tax breaks amount to nearly $1.7 billion in lost federal revenues over 10 years.
Deductions - Policymakers - Tax - Rates - Percent
By eliminating these deductions, policymakers could reduce marginal tax rates by as much as 16 percent without losing any revenue. This would give tax relief to the 70 percent of federal taxpayers who do not itemize, and therefore receive no benefit from the state and local tax deduction.
That’s exactly the type of pro-growth tax reform that policymakers have been talking about—getting rid of special interest tax breaks that hurt, rather than help the economy, and replacing them with lower tax rates for everyone.
Policymakers - State - Deductions - Tax - Break
So why are some policymakers trying to preserve the state and local deductions, or convert them into another equally irrational and preferential tax break? Probably because that’s what happens when special interests and powerful constituents come knocking on politicians’ doors.
To understand just how nonsensical and detrimental these tax breaks are, consider the following.
Tax - Deduction - States - Tax
The tax deduction encourages states to tax and spend more than they otherwise would.
Because federal taxpayers pick up a big portion of the tab, state and local governments spend more than they should, doing things like turning personal trash collection into a public, taxpayer-provided service.
Budget - Shortfalls - Deduction - Tax - Increases
And when they face budget shortfalls, the deduction makes tax increases preferable over spending cuts because federal taxpayers end up picking up as...
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