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Does Deductibility Influence Local Taxation?

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  • Robert P. Inman

Abstract

Recent proposals to reform the U.S. tax code all contain significant reforms of the cufrent provision allowing for the deductibility of state and local taxes.This paper examines the effect of deductibility reform on the revenue decisions of the largest U.S. cities. The analysis of eight alternative reforms concludes:(1) total taxes change very little in the long-run, falling at most by 13% and, for many cities, even rising slightly; (2) fees and license revenue (predominantly a tax on firms) generally fall, in some cases by 30% or more; (3) the net effect on total revenues (tax plus fees) is generally small, never declininq by more than 12% even with full loss of deductibility; and (4) policies to offset city revenue losses are effective in neutralizing the negative effects of deductibility reform.

Suggested Citation

  • Robert P. Inman, 1985. "Does Deductibility Influence Local Taxation?," NBER Working Papers 1714, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:1714
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    1. Hettich, Walter & Winer, Stanley, 1984. "A positive model of tax structure," Journal of Public Economics, Elsevier, vol. 24(1), pages 67-87, June.
    2. Grieson, Ronald E., 1974. "The economics of property taxes and land values: The elasticity of supply of structures," Journal of Urban Economics, Elsevier, vol. 1(4), pages 367-381, October.
    3. John M. L. Gruenstein, 1980. "Jobs in the city: can Philadelphia afford to raise taxes?," Business Review, Federal Reserve Bank of Philadelphia, issue May, pages 3-11.
    4. Haurin, Donald R., 1981. "Local income taxation in an urban area," Journal of Urban Economics, Elsevier, vol. 10(3), pages 323-337, November.
    5. Roger H. Gordon & Joel B. Slemrod, 1986. "An Empirical Examination of Municipal Financial Policy," NBER Chapters,in: Studies in State and Local Public Finance, pages 53-82 National Bureau of Economic Research, Inc.
    6. Buchanan, James M & Lee, Dwight R, 1982. "Tax Rates and Tax Revenues in Political Equilibrium: Some Simple Analytics," Economic Inquiry, Western Economic Association International, vol. 20(3), pages 344-354, July.
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    Cited by:

    1. Feldstein, Martin S & Metcalf, Gilbert E, 1987. "The Effect of Federal Tax Deductibility on State and Local Taxes and Spending," Journal of Political Economy, University of Chicago Press, vol. 95(4), pages 710-736, August.
    2. Bahl, Roy W. & Sjoquist, David L., 1990. "The State and Local Fiscal Outlook: What Have We Learned and Where Are We Headed?," National Tax Journal, National Tax Association, vol. 43(3), pages 321-42, September.
    3. Dick Netzer, 1985. "The effect of tax simplification on state and local governments," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, vol. 29, pages 222-258.
    4. Daniel R. Feenberg & Harvey S. Rosen, 1985. "The Deductibility of State and Local Taxes: Impact Effects by State and Income Class," NBER Working Papers 1768, National Bureau of Economic Research, Inc.
    5. Loeb, Susanna & Socias, Miguel, 2004. "Federal contributions to high-income school districts: the use of tax deductions for funding K-12 education," Economics of Education Review, Elsevier, vol. 23(1), pages 85-94, February.
    6. Robert P. Inman, 1989. "The Local Decision to Tax: Evidence from Large U.S. Cities," NBER Working Papers 2921, National Bureau of Economic Research, Inc.
    7. Douglas Holtz-Eakin & Harvey S . Rosen, 1988. "Tax Deductibility and Municipal Budget Structure," NBER Chapters,in: Fiscal Federalism: Quantitative Studies, pages 107-136 National Bureau of Economic Research, Inc.
    8. Holtz-Eakin, Douglas & Rosen, Harvey, 1990. "Federal deductibility and local property tax rates," Journal of Urban Economics, Elsevier, vol. 27(3), pages 269-284, May.
    9. Roberto Dell’Anno & Jorge Martinez-Vazquez, 2013. "A Behavioral Local Public Finance Perspective on the Renter’s Illusion Hypothesis," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper1303, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.

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