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The Effect of Tax Simplification on State and Local Governments

By Dick Netzer


The essence of any serious program of federal tax simplification is the same today as it was when Pechman first broached the idea more than 30 years ago: include as taxable income a larger share of economic income and subject that broader base to much lower marginal rates of tax. The lower marginal rates themselves will reduce the relative attractiveness of whatever tax shelters remain. As part of the base broadening, nearly all federal tax reform plans would narrow--in some cases eliminate--deductibility of state and local taxes. These proposals are an extension of a trend that began with the exclusion of excises and license taxes in 1964, extended to gasoline taxes in 1978 and was seriously considered for the sales tax in the debate that led to TEFRA in 1982. Current tax reform plans also either eliminate tax-exempt borrowing or restrict it by removing tax exemption from some types of borrowing. The Deductibility of State and Local Taxes Eliminating or substantially restricting deductibility raises the net costs of state-local taxes to itemizers; if their voice is politically effective, there should be some reduction in the revenue raised by currently deductible taxes, especially in the states with relatively high tax rates, with possible effects on the level of state-local spending and on the structur

Year: 2013
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