Social and Behavioral Sciences Commons^™

The Effect Of Federal Tax Deductibility On State And Local Taxes And Spending, Gilbert E. Metcalf, Martin S. Feldstein

Gilbert E. Metcalf

This paper examines the effect of federal deductibility of state and local taxes on the fiscal behavior of state and local governments. The primary finding is that deductibility affects the way that state and local governments finance their spending as well as the overall level of spending. More specifically, in states in which federal deductibility implies a relatively low cost of using deductible personal taxes (including income, sales, and property taxes), there is greater reliance on those taxes and less reliance on business taxes and other revenue sources. The effect of deductibility on the state and local financial mix implies …