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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