A Republic of the Mind: Cognitive Biases, Fiscal Federalism, and Section 164 of the Tax Code

Abstract

In its efforts to guide money to the states, our federal government annually passes up more than $75 billion in potential revenue under a single provision of the Tax Code. That provision, section 164 of the Code, allows itemizing taxpayers to deduct the cost of the state and local income, property, and (to a limited extent) sales taxes they paid during the tax year. The eye-popping size of that number makes section 164 a perennial issue in tax policy circles, and as one of the deductions omitted from the Alternative Minimum Tax\u27s (AMT) parallel tax universe, the section is also a key component of debates about the AMT. Indeed, the President\u27s Advisory Panel on Tax Reform recommends eliminating the deduction to pay for its proposed AMT reform