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End the State Tax Deduction

My colleague Alex Brill has come up with a revenue-neutral plan to make the tax code more progressive and pro-growth. Among his six proposals: phase out the federal deduction for state and local taxes.

That’s the right thing to do for any number of reasons. As Brill points out, the deduction acts as a subsidy to state and local governments, thus leading them to over-provide public services. The subsidy effect is largest in high-tax states with lots of high-income earners (who are most likely to itemize their deductions), such as New York and California. Phase out the deduction: the tax code would become more progressive.

I’d add this: the federal system would become more competitive. We’re being told to no end that states should serve as “laboratories of democracy.” I confess to my ambivalence about that notion. With Madison, I’m skeptical of “that inconstancy and mutability in the laws, which form the greatest blemish in the character and genius of our [state] governments.” (Federalist 62.) Be that as it may, though, no case can be made for subsidizing state experimentation from federal revenues.

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