The AP reports:
Sen. Chuck Schumer, D-N.Y., said the panel's recommendations to eliminate the state and local tax deduction would slap a $12 billion tax on New Yorkers. Rep. Steve Israel, D-N.Y., and Rep. Katherine Harris, R-Fla., said another suggestion — shrinking homeowners' tax breaks — would hurt families in states with expensive housing.
Yes, New York would get hit with more taxes, but why should Indiana taxpayers New Yorker's voting stupidity? Indiana needs more tax revenue, but raising taxes in Indiana is not politically tenable. Instead, we get a much smaller federal income tax deduction due to lower taxes: translated, that means that the federal government is not giving us as much discount on our taxes. All other things being equal, if New York pays more federal taxes ($12 B) and Indiana pays more taxes (let's make up a number for this exercise - $500M), the federal government will have $12.5B that it could theoretically cut out of its budget. As theory goes, the federal government could cut the federal tax rate by an amount to return the $12.5B to the taxpayers. I would hazard a guess that Indiana would get more than $500M in savings. If it were $700M in savings and Indiana adjusted its tax rate higher from 3.4% to capture that $700M, we would end a small state subsidy of a big state tax debacle.
All speculation, but sound theory. I wonder what the facts would be.
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