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82 Va. L. Rev. 413 (1996)
Fiscal Federalism and the Deductibility of State and Local Taxes under the Federal Income Tax

handle is hein.journals/valr82 and id is 431 raw text is: VIRGINIA LAW REVIEW VOLUME 82 APRIL 1996 NUMBER 3 ARTICLE FISCAL FEDERALISM AND THE DEDUCTIBILITY OF STATE AND LOCAL TAXES UNDER THE FEDERAL INCOME TAX Louis Kaplow* Whether state and local taxes are deductible is believed to have impor- tant effects on revenue, tax equity, and the operation of state and local governments. This Article's analysis of deductibility draws on previous work that addresses the fiscal activity of state and local governments in order to examine the incidence of both taxes and the benefits they finance. The desirability of deductibility is assessed not only by reference to whether it is required by a conceptually pure income tax but also in terms of how it serves the underlying objectives of the income tax. The results of this investigation contradict many of the arguments offered by advocates and opponents of deductibility. INTRODUCTION ..................................... 415 I. BENCHMARK CASES AND ABILITY TO PAY ..........420 A. Taxes Equal to Benefits within the Jurisdiction .... 421 B. Taxes Unrelated to Benefits within the Jurisdiction . 423 1. Basic Analysis ......................... 423 Professor, Harvard Law School and Research Associate, National Bureau of Economic Research. I am grateful for comments from William Andrews, David Bradford, Howell Jackson, Christine Jolls, Daniel Rubinfeld, Daniel Shaviro, and workshop participants. I am also grateful for research assistance from David Elsberg and George Wang and for support from the John M. Olin Center for Law, Economics, and Business at Harvard Law School. 413

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