Working Paper: NBER ID: w2427
Authors: Douglas Holtz-Eakin; Harvey Rosen
Abstract: In current discussions of tax reform in the United States, there is considerable controversy concerning the effects of allowing individuals to deduct state and local taxes when calculating their federal income tax liability. Recent econometric work has suggested that federal deductibility of state and local taxes has raised the proportion of these taxes -- especially property taxes -- in local budgets. This paper lends additional support to these earlier findings by showing that one channel through which deductibility leads to higher local property tax revenues is by increasing the rate of local property taxation. Specifically, we find that if deductibility were eliminated, the mean property tax rate in our sample of 82 communities would fall by 0.00715 ($7.15 per thousand dollars of assessed property), or 21.1 percent of the mean tax rate.
Keywords: tax reform; federal deductibility; local property tax; municipal finance
JEL Codes: H24; H71
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Federal deductibility of property tax payments (H20) | Local property tax rates (H71) |
| Elimination of federal deductibility (H20) | Mean property tax rate (H71) |
| Federal deductibility of state and local taxes (H71) | Proportion of these taxes in local budgets (H71) |