The Deductibility of State and Local Taxes

President Reagan's tax reform proposals of May 1985 recommendedeliminating the deduction of state and local taxes in computingfederal taxable income. Arguments for and against deductibilityappeal to equity for taxpayers facing levies from multiple governmentsand to concern for the roles and responsibilities of governmentsin a federal system. Intense criticism and lobbying againstthe president's proposal was spearheaded by New York. The debatewas soon recast to emphasize the impact of change on other states,especially in the Northeast and Midwest, and the potential widespreadnegative effects on government services, especially education.The broadened base of opposition to change was sufficient tosustain deductibility in the bill passed by the House of Representativesin December 1985, illustrating that a cohesive lobbying effortinvoking the concept of federalism as a partnership can be fashionedby appealing to states on the basis of the negative consequencesof change.