Wednesday, February 15, 2017

Paying for Trump's Federal Income Tax Cut: Eliminate State & Local Income Tax Deductibility

Newly elected President Trump has called for collapsing the current federal income tax brackets from seven to three: 12%, 25% and 33%. According to the Tax Foundation, this change would cost the U.S. Treasury $1.1 trillion to $2.5 trillion in tax collections over 10 years.

Congressional representatives argue that adding this to the current federal debt of almost $20 trillion is irresponsible and instead must be "paid for" by eliminating deductions. One of those deductions is state and local income taxes.
According to my calculations, jettisoning this deduction would add almost $60 billion to U.S. Treasury coffers yearly. Of course, high income tax states would bear the brunt of the cost.

Taxpayers suffering the biggest burden of the change would be Californian's paying $14.1 billion, New Yorkers losing $9.8 billion, and New Jersey residents forking over an additional $3.2 billion--all three states' electoral votes captured by Clinton. In fact, the median individual income tax rate for states won by Clinton was almost 20% higher than that for states secured by Trump. In terms of shifting individual tax burdens, this change would cost taxpayers with incomes over $200,000 an average of approximately $7,000, but an average of only $100 for taxpayers making less than $200,000.

From the Trump standpoint, abolishing this deduction would produce greater tax transparency, reduce the incentives for state and local governments to raise taxes, tend to benefit states that Trump carried in the election and cost states that Clinton captured.

Ernie Goss

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