How federal policymakers account for the concerns of state and local governments in the formulation of federal tax policy

Federal tax policy affects states and localities in at least four ways. First, it grants tax preferences such as deductions for taxes and tax exempt bonds. Secondly, it has indirect effects, especially on interest rates. Thirdly, when states conform to the federal base to simplify compliance and administration, changes in the federal base have implications for state revenues. Finally, the federal government imposes restrictions and mandates. While federal policy has been very protective of direct preferences, and states and local governments are given a fairly free hand with these benefits, in the other cases, state concerns appear to have little impact.