Fighting to save blue state tax break

December 6, 2012: 9:05 AM ET
chart tax deductions 2
NEW YORK (CNNMoney)

Democrats are expected to fight hard to preserve the tax deduction for state and local taxes, despite its more than $80 billion cost to the federal budget, during the fiscal cliff negotiations. A look at the states that benefit most from the deduction makes it clear why.

Seven of the eight states where taxpayers make the greatest use of the deduction are deep blue on the political maps. They include California, the most populous state, and Illinois, where President Obama calls home.

The states -- which also include New York, New Jersey, Pennsylvania, Massachusetts and Maryland -- have among the highest state and local taxes, including property taxes that pay for running municipal government and school systems. They also have among the highest median incomes in the nation.

No other tax break is as geographically concentrated. Nearly 90% of the state and local tax deductions filed by the nation's taxpayers are from those seven high-wage, high-tax blue states, according to figures from the nonpartisan Tax Policy Center.

Because there is no cap on the deduction, most dollars of the tax benefit it provides flow through to nation's top wage earners. But it's also an important break for many middle-income taxpayers in those states, who are looking for a little help to deal with the high cost of living in those states.

So while Democrats are eager to raise taxes on the wealthy, they are likely to fight to protect this deduction. Between them those seven states will have 12 Democratic senators in the upcoming Congress.

"Eliminating this deduction would make the tax code a lot more progressive," said Joe Henchman, vice president for state projects for the Tax Foundation, a think tank that tracks taxes and tax legislation. "But it'll be a lot of blue state senators who will fight very hard to prevent that from happening."

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Nicholas Johnson, vice president for state fiscal policy at the Center on Budget and Policy Priorities, said a limit on the deduction is more likely than eliminating it. That way, the break could be protected for middle-income taxpayers.

Johnson and Henchman agree any limit or repeal of the deduction would put tremendous pressure on the states to roll back their own income and property taxes. That's one reason that states have fought so hard to maintain the deduction in past tax reform efforts.

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"They considered it in 1986 as part of the big tax reform then, and New York and some other high income jurisdictions fought very hard to take it off the table," said Henchman. "They made the case to fellow states that all of us benefit from this deduction."

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