The state and local tax deduction effectively encourages higher taxes by state and local governments. By requiring higher federal marginal tax rates to replace lost revenue, the state and local tax deduction further severs the link between taxes paid and services received, effectively forcing all federal taxpayers to pay, in part, for services provided to residents of other states. Federal tax rates could decline significantly— by as much as 12.5 percent—if policymakers eliminated the state and local tax deduction and replaced it with a revenue-neutral and distribution-neutral reduction in marginal tax rates.
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