Last month, the Congressional Budget Office issued an interesting study on The Deductibility of State and Local Taxes. I think some of the findings might surprise most readers.
First, Table 1 shows the estimated cost of Federal Aid to State and Local Governments. Tax expenditures, in the form of deductibility of state and local taxes from income for federal tax purposes represents about 10% of what Direct Grants represent; Tax-Exempt Bonds are an additional 10%.
Table 2 shows the sources of revenue for State governments, by state. Alaska, for example, gets nearly 80% of its revenue from nontax sources -- oil revenue, for example, and its residents pay little in state taxes that are deductible for federal taxes purposes.
Table 3 shows the sources of revenue for Local governments, by state. On average, for the entire US, local government got (2004) 37.6% of its revenue from property taxes. But look at the figures for some of the states that tend to have the best school systems and value education most highly:
- Connecticut 72.3%
- Maine 74.9%
- New Hampshire 76.9%
- New Jersey 75.5%
- Wisconsin 54.2%
- Massachusetts 54.2%
Then we see some of the states whose schools have poorer reputations, and which send fewer of their children to college
- Alabama 13.7%
- California 26.0%
- Kentucky 27.1%
- Louisiana 22.1%
Table 4 shows just how concentrated the benefits of the Deductibility of local taxes flow are. In 2004, about 35% of taxpayers deducted state and local taxes. In the highest income groups -- those whose adjusted gross incomes exceeded $100,000 per year -- over 90% of taxpayers claimed this deduction. Those taxpayers -- 9.8% of us -- received 66.4% of the benefit. And those with AGI over $1 million -- 0.2% of us -- received 15.9% of the benefit, an average of over $200,000 each. (Remember, this is just state and local income and property taxes, and doesn't take any account of an interest deduction!)
This phenomenon is related to what Fred Harrison is describing in his YouTube video and in his book. Who pays the taxes? Who gets the benefits of the public spending?
Table 5 shows the average taxes-paid deduction, by state, for those who claimed the deduction. It averages $6,767 for the entire US, and ranges as follows:
South Dakota 15.9% of taxpayers, averaging $3,523 each
West Virginia 18.2% of taxpayers, averaging $5,894 each
Maryland 48.3% of taxpayers, averaging $8,724 each
Massachusetts 40.0% of taxpayers, averaging $9,958 each
California 39.6% of taxpayers, averaging $10,292 each
Connecticut 46.0% of taxpayers averaging $12,082 each
New Jersey 46.7% of taxpayers, averaging $11,207 each
New York 38.4% of taxpayers, averaging $13,109 each
The rest of the study goes on to compare the likely results of various changes in tax policy, including indexing the AMT, on various AGI groups. I found myself wishing that in each of the remaining tables, the column which showed just how many of us fell into each income category in 2004 (from Table 4) were displayed.
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