NCPA - National Center for Policy Analysis

The Benefits of Eliminating Federal Deductibility

August 4, 2003

In Canada, the lack of federal deductibility of provincial taxes has led to vigorous tax competition, particularly on personal income taxes, say Chris Edwards (Cato Institute) and Jason Clemens (Fraser Institute).

Ontario set the pace with a 30 percent across-the-board rate cut in 1995 and a 20 percent cut later in the decade. Other provinces had to take action because interprovincial migration of skilled workers is high, explain the authors:

  • Alberta responded first by replacing its multiple tax rate structure with a flat rate income tax at 10 percent, the lowest in the country.
  • British Columbia was next with a 25 percent across-the-board rate cut in 2001.
  • Since then, Saskatchewan has reduced income tax rates and Quebec has elected a government promising to cut tax rates by 27 percent over five years.
  • Eliminating deductibility of state taxes from the federal tax code would also eliminate the current bias in favor of states having deductible income taxes instead of more efficient, but nondeductible, sales taxes.
  • Elimination of the federal deduction for state and local taxes could generate about $70 billion that could be used for tax code reforms, such as substantial tax rate cuts and repeal of the alternative minimum tax.

Canadian tax policy leaves much to be desired, but on tax competition we should change the federal tax code to get the states acting more like the Canadian provinces, say the authors.

Source: Chris Edwards and Jason Clemens, "State Tax Hikes Aided By Deductibility Rules," Investor's Business Daily, August 4, 2003.


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