Economist Says Eliminating State and Local Tax Deduction Helps Lower Taxes by $1 Trillion

100 state legislators sign letter to Congress to urge them to eliminate the deduction and pass tax reform

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October 17, 2017

Eliminating the state and local tax deduction through President Trump's tax reform framework could help lower taxes by $1 trillion, according to economist Stephen Moore, who helped put the original tax plan together.

Moore says eliminating the state and local tax deduction will increase revenues for the government over the next decade by $1 trillion, which can be used to cut tax rates even lower.

"We do need the trillion dollars of revenue you get from eliminating the state and local tax deduction to pay for the lower tax rates on businesses and families because we want to get this to about a $2.5 trillion tax cut, and a trillion of that will come from eliminating the state and local tax deduction," Moore explained in a conference call. "This is a provision of tax code that is quite unfair to the low-tax states and I would make the case also that if you are for limited government and more private sector growth then there is absolutely no question that the fact of state and local tax deduction is to encourage more public provision of goods and services and fewer private provisions of services."

Moore said state and local governments will be some of the biggest winners from the tax reform plan since the money that will not be used on taxes will stay in the states.

"The idea that states and localities are going to be victims of the Trump tax cut are 100 percent reversed of the truth, so the biggest beneficiaries of this federal tax cut—which will be somewhere at the end of the day about $2.5 trillion over 10 years—will be state and local governments."

"When the federal government doesn't take $2.5 trillion from the taxpayers of states, that's $2.5 trillion that stays in the local and state economies that never has to go to Washington in the first place," Moore said.

According to Moore, the elimination of this deduction can achieve about an additional 0.5 percentage point growth to the economy, which will further help state and local governments.

"The most important thing by far for state and local governments in terms of paying their bills is a strong national economy, and this will help us get it there."

Eliminating the state and local tax deduction has the support of more than 100 state legislators who signed a letter to Congress, urging them to get rid of the deduction and pass tax reform:

"Eliminating the state and local tax (SALT) deduction would provide upwards of $1.5 trillion over the next decade to implement broad-based tax cuts nationally. This overhaul would spur the growth in economic output needed to jolt business investment, personal income growth, and job growth."

"For many taxpayers outside of the high-tax locales, the savings from lower federal rates will outweigh the loss of the federal deduction even without positive changes at the state and local level," the legislators wrote. "Abolishing state and local tax deduction would force residents to take a much harder look at their state and local tax rates."

Published under: Tax Reform , Taxes