Subsidizing Economic Segregation Through the State and Local Tax Deduction

Abstract

Economic segregation has increased over the past half century. The trend of rich localities getting richer while poor localities get poorer is particularly concerning because it limits upward mobility and perpetuates intergenerational income inequality. This Article makes the novel argument that the state and local tax deduction subsidizes economic segregation. It arrives at that conclusion by showing that the “local tax deduction” provides a greater subsidy, per capita, for wealthy, economically segregated localities because only those localities have a critical mass of wealthy taxpayers who claim the deduction. This allows wealthy localities, but not poor localities, to provide services at a cost less than face value to their residents. This Article argues that the deduction’s subsidy for wealthy localities rewards and likely contributes to economic segregation because it provides an incentive for the wealthy to segregate into wealthy, subsidized localities over less segregated and less subsidized localities. This Article’s analysis and arguments are particularly relevant in light of recent controversy surrounding the state and local tax deduction, including the new $10,000 limit on the deduction, efforts to circumvent this limitation, and Congressional proposals to reform it.

Keywords: State and Local Tax Deduction, SALT Deduction, $10,000 Cap, Economic Segregation, Income Inequality, Tax

JEL Classification: K34, H23, H24, H41, H52, H71, H72, H73, H74, H75, H77