Disaggregating the State and Local Tax Deduction

61 Pages Posted: 13 Jul 2015 Last revised: 23 Aug 2018

See all articles by Gladriel Shobe

Gladriel Shobe

Brigham Young University - J. Reuben Clark Law School

Date Written: July 12, 2015


The appropriateness of a federal deduction for state and local taxes is a frequent point of contention among scholars and policymakers, and various proposals have been offered to limit or modify the deduction. All of the debates and proposals surrounding the deduction treat states and localities as if they were the same. This Article disaggregates state and local governments to show that the way they tax and spend is different in many ways that are relevant to the deduction. When state and local government revenues are disaggregated, it becomes clear that the “state and local tax deduction” is actually two distinct deductions, one primarily for state income taxes and another primarily for local property taxes. Property taxes, which make up nearly three-quarters of local taxes, are fully deductible. Sales taxes, which make up nearly half of state revenue, can only be deducted in lieu of income taxes, an option that few itemizing taxpayers take. When state and local expenditures are disaggregated, it becomes apparent that local expenditures provide more direct benefits to taxpayers living within relatively homogeneous localities while state expenditures provide fewer public benefits to those who pay state taxes and are more likely to result in redistribution. This Article evaluates the arguments traditionally made for and against the deduction in light of the differences between state and local revenues and expenditures, revealing that the arguments for the deduction apply more strongly to states while the arguments against the deduction apply more strongly to localities. This means that Congress currently has the deduction backwards: local taxes are proportionately more deductible than state taxes even though a deduction for local taxes is less justified than a deduction for state taxes. This Article builds on this analysis to provide an initial framework for how federal deductibility for state and local taxes could be more fairly and efficiently constructed to account for the differences between states and localities.

Keywords: Tax, State and Local Tax Deduction

Suggested Citation

Shobe, Gladriel, Disaggregating the State and Local Tax Deduction (July 12, 2015). 35 Virginia Tax Review 327 (2016), Available at SSRN: https://ssrn.com/abstract=2629841

Gladriel Shobe (Contact Author)

Brigham Young University - J. Reuben Clark Law School ( email )

430 JRCB
Brigham Young University
Provo, UT 84602
United States

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