The Case For Local and State Deductions

The run-up to any presidential election results in a plethora of ideas being floated – some good, some bad, some new, some old.  This election is no different.  It is particularly important to highlight the recent rehash of an old – but terrible – idea because it would have a devastating impact on New York: the repeal of the deduction for state and local taxes.

The repeal of the deduction for state and local taxes is floated occasionally as a means to shrink the federal budget deficit. Efforts to close the federal budget gap, however, should not come at such a high expense to taxpayers in states like New York. There is a distinct disparity throughout the U.S. in terms of local taxation, and adopting a “one size fits all” tax reform plan fails to acknowledge that diversity. In other words, a tax plan that might work perfectly in one state might have devastating results in others; in this case, New York is one of those other states.

Let’s look at the facts.  In 2013, New York State sent $200 billion to the federal government. In return, it received from the federal government $0.58 for every dollar its citizens paid in federal tax. Slightly less than half of New York State’s budget is provided by the federal government, placing us in the bottom ten of states that receive financial support from the federal government. This lopsided flow of money from New York to the federal government would be severely worsened if the deduction of local and state taxes were eliminated.

Repealing the write-off in New York would also severely impact New Yorkers’ quality of life. Cutting the state deduction would eventually put pressure on local governments to lower the taxes that fund critical services. State and local income taxes are used to support schools, public safety, and transportation, and some of these services actually require more, not less, support and funding than they are currently receiving in order to keep up with New York’s rapidly growing population.

Without this deduction, New York City residents’ total income would be taxed twice – once by both the state and then by the federal government – with no deduction allowed for money already paid to the state. As a result, they would have their wallets picked for approximately $3 billion. This is money that would otherwise be spent by New Yorkers on local businesses, goods, and services. Because New York receives $0.58 back for every dollar it gives in federal taxes, a large portion of our tax dollars would effectively be going to other states more reliant on federal funding. More simply, cutting the state deduction would be taking $3 billion dollars out of our pockets, and putting a considerable amount of it into someone else’s in some other part of the country.   

New York’s elected officials have done a great job fighting off this terrible idea in the past. In 2006, following the Advisory Panel on Federal Tax Reform’s recommendation that the state and local tax deduction be eliminated, Senator Charles Schumer released a comprehensive report showing the devastating impact this proposal would have on Upstate New York. His analysis detailed how much more in taxes residents all over New York could wind up paying, and described the idea as “an absolute killer for New York.”

When the idea was discussed again in Washington in 2012, former Mayor Michael Bloomberg authored a piece in the Daily News in which he addressed the need for Congress to raise revenue, but explained how disproportionately hard this tax increase would affect New York City and other residents of high-tax paying states. In addition to placing an unbalanced weight of the burden of funding New York City and the country on the shoulders of New Yorkers, another possibility the former Mayor presented is that many citizens might choose to leave New York altogether.

Many other public officials have come forward over the years to oppose this tax. The time has once again come for our representatives to voice their opposition to this proposal, and let Washington know the unfair effects it would have on New York.  We need to remain ever vigilant to ensure implementation of this idea never sees the light of day.