Tuesday, November 23, 2010


Many of the tax reform proposals that are surfacing recommend eliminating the itemized deduction for local real estate and state and local income or sales taxes. Some also call for doing away with the deduction for mortgage interest; one wants to replace the deduction with a 15% credit.

I want to keep the deductions for state and local taxes and mortgage interest on acquisition debt.

We are well aware that a family living in New York, New Jersey or California with a combined annual income of $150,000 may just be getting by, or is barely comfortable, while a similar family residing elsewhere in the US can live like royalty on $150,000 per year. However the federal income tax system is geographically neutral - the tax rate schedules are the same no matter where in the US you live.

So it is possible that a family in middle America, with less actual dollars of earnings but a much higher disposable income and standard of living, is paying a smaller federal income tax than one with less disposable income, due to a much higher cost of living, in the Northeast.

The income is higher in certain regions of the country because the cost of living, including housing costs and state and local real estate, income and sales taxes, is much higher. The cost of a home is much higher in New Jersey than Kansas, and so are the state income taxes and local property taxes and corresponding mortgage interest.

The deductions for local real estate tax, state and local income or sales tax, and mortgage interest on acquisition debt are greater in New York, New Jersey, California, and other higher income states than in states with lower costs of living. The ability to claim these deductions helps to provide some degree of regional “equalization” and alleviate geographic tax “penalties”.


1 comment:

Peter Reilly said...

A lot of people tend to lose the state tax deduction to the AMT. I remember doing a return that was in AMT and I couldn't see why. Just living in NYC with a decent salary was enough to do it. One of my ideas for reform and simplification is to repeal the regular tax. Nobody listens to me though.