November 2, 2005
Proposals to eliminate the federal tax deduction for state and local taxes were greeted with skepticism and concern by representatives of the National League of Cities (NLC), who called them a tax increase for millions of middle-class Americans.
Reacting to the major recommendations released by the President's Advisory Panel on Federal Tax Reform, NLC called the proposals a "shell game" and "double taxation."
"As we have been warning since April, the proposal to eliminate the deduction for state and local taxes is nothing but a tax increase for the millions of middle-class taxpayers who itemize," said NLC Vice President Bart Peterson, mayor of Indianapolis. "This is a shell game -- they are proposing to lower some taxes here and make you pay more over there."
NLC officials are concerned that the panel's recommendations could be harmful to cities and their residents.
"We need true reform that improves the fairness of the system by broadening the tax bases, not one that punts the costs to the state and local governments," said James Hunt, NLC first vice president and council member of Clarksburg, W. Va.
The current tax code does not match the new economy and it doesn't appear as if the panel's recommendations fundamentally change the code. They haven't addressed the expanding technology and new forms of economic growth; instead, the costs of paying for tax reform have been shifted back to taxpayers and state and local governments," Hunt said
Peterson said the proposal amounted to double taxation: "Taxpayers would pay taxes twice -- on their income, on their property, and on any goods they purchase in their local communities, and then again on their federal tax return.
"The panel's recommendations to eliminate the state and local deductions will be rightly seen as a tax increase by taxpayers, who will then undoubtedly put pressure on local governments to lower their local tax rates to offset the higher federally mandated tax increases, Peterson added.
The panel, organized in early 2004, was charged with providing a revenue-neutral plan with specific directions that included the elimination of the alternative minimum tax (AMT), which currently applies to the top 3 percent of taxpayers.
City leaders worry about the impact of losing the home mortgage deduction at a time when the federal government continues to impose mandates on state and local governments to absorb a higher percentage of the costs of government services.
The loss of the deduction could be particularly acute for taxpayers who live in states that rely heavily on income taxes because it reduces their cities' flexibility to raise revenues from other sources.
