The URL can be used to link to this page

Home My WebLink AboutMINUTES - 10221985 - 2.2 11b: '` BOARD OF S&RVISORS 21 , FROM: Cwtra Phil Batchelor, County Administrator G� Costa DATE: October 17 , 1985 County/ SUBJECT: Deductibility of State and Local Taxes from �� `7� Federal Tax Returns SPECIFIC REQUEST(S) OR RECOMMENDATION(S) & BACKGROUND AND JUSTIFICATION RECOMMENDATIONS: 1 . Adopt a position in opposition to the proposal presently before the Congress to eliminate the deductibility of state and local taxes in order to balance the Federal budget. 2. Authorize the Chairwoman to send letters to the County' s Congressional Delegation pointing out the reasons they should oppose these provisions. BACKGROUND: The Board on October 8 asked the County Administrator for a recommendation on a position the Board should take on the proposal before Congress to eliminate the provision in federal tax law which allows a deduction against federal taxes for state and local taxes paid by the taxpayer. We recommend opposition to this proposal for the following reasons: 1 . It violates the principle of federalism: The proposal to eliminate the deduction for state and local taxes comes from an Administration that claims it is committed to "federalism"--the principle that the federal government should be responsible for only those functions required of it by the U. S. Constitution, and that all other functions not specifically reserved to the federal government are the responsibility of the states ( and local governments) . Federal law has exempted from federal income tax state and local taxes paid by a taxpayer since the instigation of the federal income tax in 1913 . As the NACO "County News" editorialized on July 29 , 1985 : "Repeal of deductibility would be a direct interference with the most fundamental of all states ' rights--the power of each state to raise revenue and finance services as it deems appropriate. CONTINUED ON ATTACHMENT: YES SIGNATURE: X RECOMMENDATION OF COUNTY ADMINISTRATOR RECOMMENDATION OF BOARD COMMITTEE X APPROVE OTHER SIGNATURE(S) ACTION OF BOARD ON C er 2" APPROVED AS RECOMMENDED X OTHER VOTE OF SUPERVISORS X UNANIMOUS (ABSENT --- ) 1 HEREBY CERTIFY THAT THIS IS A TRUE AYES: NOES: AND CORRECT COPY OF AN ACTION TAKEN ABSENT: ABSTAIN: AND ENTERED ON THE MINUTES OF THE BOARD County Administrator OF SUPERVISORS ON THE DATE SHOWN. Senator Pete Wilson ) October 22 1985 CC:c: Senator Alan Cranston ) ATTESTED Congressman George Miller ) via CAO PHIL BATCHELOR, CLERK OF THE BOARD OF SUPERVISORS AND COUNTY ADMINISTRATOR M3e2/7-e3 BY 1�'G --`--- � DEPUTY Page 2 • ps • "Washington is proposing to effectively usurp the tax base of the states and local governments to finance its own programs--directly contrary to the Administration' s 'New Federalism' which has called on the states to take vastly greater responsibility for providing and financing most social services" . 2 . It creates "Double Taxation" : Under the system which has been in effect for nearly 3/4 of a century, double taxation, or a tax on a tax, has been avoided by allowing taxpayers to deduct taxes paid to state and local governments before computing their income for federal tax purposes. Under the Treasury Department' s proposal, multinational corporations are given a tax credit for taxes paid overseas and individual taxpayers are given a tax credit, on a dollar-for-dollar basis, for taxes paid to foreign governments. Again, NACO argues: "If Washington thinks it' s wrong to tax income paid to Saudi Arabia or Japan, why should income paid to counties or to states, like California or Illinois or Florida, be taxed again by Washington?" As President Reagan noted on April 9, 1983 in rejecting the proposed elimination of deductibility: "In other words, you'd pay a tax on a tax" . 3 . Eliminating deductibility impacts the middle class as well- as the wealthy: The Administration argues that the deductibility of state and local taxes benefits only the wealthy and that eliminating deductibility will only affect the wealthy. The facts are somewhat different. According to the Government Finance Review (August, 1985) , more than 33 million Americans claimed this deduction in 1982 and more than half of these taxpayers earned under $30 , 000. Eighty-seven percent ( 870) earned less than $50,000 . Throughout the . United States, 410 of all taxpayers itemize their deductions. These figures are even higher in many states with relatively higher state taxes ( income tax, sales tax, and property tax) : New York 51%; Michigan 50%; Maryland 510; Minnesota 500; California 470. However, even in states with relatively low state taxes, high proportions of taxpayers itemize deductions and would be hurt by the elimination of the deductibility provision: Oregon 49% ; West Virginia 49 Utah 58%; Colorado 510; Arizona 48%. 4 . The ,cost of state and local services will increase: Every study, including those of the Treasury Department, has concluded that eliminating the deduction would result in a reduction of state and local services in every state--not just the "high tax" states. Without deductibility, taxpayers will perceive the real cost of state and county services to have increased and will push for reductions in programs and expenditures. (NACO County News, July 29, 1985 ) . Say, for example, that a taxpayer has a state tax liability of $1000 and a marginal federal income tax rate of 30%. He can use deductibility to reduce the net state tax liability by $300, to $700 . Therefore, this taxpayer' s net state liability of $700 provides state government services with $1,000 . Removing deductibility of state and local taxes increases the net cost of services for taxpayers--yet, the amount of service wouldn' t change. In our example, the taxpayer' s net state taxes would increase by $300, but the quality of the roads, frequency of garbage collection, or number of schools it buys him won' t change. (From remarks by H. Louis Stettler III, Secretary of the Maryland Depart- ment of Budget and Fiscal Planning before the U. S. House Page 3 of Representatives ' Committee on Banking, Finance and urban Affairs ' Subcommittee on Economic Stabilization) . 5 . Home values will decline: Eliminating the deductibility of property taxes will increase the annual cost of maintaining a home and will consequently decrease the market value of the property. A family that saved for many years to buy their own home will find that this provision--regardless of whether it raises or lowers their federal tax burden--is likely to cost them far more in the lowered value of their home' s equity. And the economics of homeownership for first-time buyers will be significantly altered if property taxes can no longer be deducted, denying many couples the ability to own their home and reducing demand in the housing market. 6 . Local government' s credit ratings will suffer: By hindering the ability of state and local governments to raise revenues, the repeal of deductibility would put downward pressure on municipal credit ratings. As a result, the cost of state and local borrowing would rise. Bond ratings have nothing to do with whether an area has high or low taxes, but with restrictions on raising taxes--the ability of the entity to raise revenues when necessary. Areas that will be most harshly affected will include taxing authorities whose budgets have recently been voted down by the voters or met stiff resistance, regardless of the state in which they are located.