ASSESSING THE FEDERAL DEDUCTION FOR STATE AND LOCAL TAX PAYMENTS

This paper examines the distributional and behavioral impacts of ending the deductibility of state and local taxes against the federal individual income tax. I carry out a number of distributional analyses - considering both variation across income and across states - of the subsidy from deductibility as well as the distributional impact of potential partial reforms. I also consider how behavioral responses affect the distributional analysis. Using a large panel of data on state and local governments, I find that deductibility increases reliance on deductible taxes and increases state and local spending out of own-source revenue.