Tax Deduction of the Moment -- State and Local Taxes

In today's news, we hear that a reporter for NBC News was standing outside a fundraiser in Florida where Mitt Romney spoke yesterday and that the reporter overheard Romney say that he might do away with deductions for state and local taxes in order to pay in part for the 20% across the board tax rate reduction that he favors. Romney also suggested that he might limit the interest on home mortgage deduction to principal residences only and not second homes. These possibilities are now news with the Obama campaign complaining that Romney is only telling big donors his plans for taxes rather than the American people. Of course, that is hysterical since president Obama has no plans for taxes aside from raising them with the Buffett Rule.

But I digress. The subject of this post is the deduction for state and local taxes. All I can say is that it is about time that this deduction ended. The best way to consider this deduction is to first ask a question.

Do you think it is fair for people who live in cities that keep down municipal costs should subsidize folks in cities where the government spending is out of control? In other words, if New York City wants to give extravagant pensions to its employees, should the people in Kansas pay part of the cost of those pensions? I think the clear answer is NO!

The income tax deduction for state and local taxes is just such a subsidy for profligate states and local governments. As the state or city overspends and is forced to raise taxes, the citizens of that locality get a benefit on their federal income taxes which lessens the impact of the
rising local taxes. The same person making $100,000 per year in Texas pays higher federal taxes than his counterpart in California for just this reason.

There is no reason why state and local taxes should be deductible other than that they always have been in the past. That, however, is not a valid reason for anything. Using that logic, there would still be slavery in the USA and women would not be allowed to vote.

I applaud Romney for having the courage to consider getting rid of this unfair deduction. I would think many Democrats would agree as well. After all, all those Hollywood stars who keep telling us that the rich should pay more taxes will get their wishes if the deduction for state and local taxes is ended. They live in California which has just about the highest taxes in the country. Once those are no longer deductible, the stars can all pay more in taxes.