The question of deduction of state taxes on one’s federal return has been hot the last few days. It is a tough question and I would like someone to tell me if my take on the subject has any merit.
The dollar figures following are for illustration purposes only. If I lived in a high tax state like California, Illinois, etc., I would love the deduction, but living in a relatively well run low-tax state I do not like the deduction. WHY? If the government needs to generate $1,000 from income taxes and gives a $100 deduction to the high-tax state and let’s say a $20 deduction to the low tax state, then it only receives $880 compared to the $1,000 it would get without the deductions. What does it do but raise the tax rate to cover the shortfall?
Presuming that we all pay the same percentage rate, who gets hurt the most? The low-cost state as it must participate in covering the $120 shortfall, only $20 of which was caused by the low-tax state. To me this means I am unwillingly subsidizing the high-cost state.
I am not a mathematician or accountant, so will someone tell me if I am wrong?