The Congressional Budget Office has issued a report on the deductibility of state and local income taxes, looking at the benefits and drawbacks of the system.

"Deducting state and local taxes under the federal individual income tax subsidizes the revenue-raising activities of state and local governments as long as the revenues are raised through deductible taxes," said the report. "Because taxpayers who claim the 'taxes-paid' deduction may thereby reduce their federal tax liability, the 'cost' to the itemizing taxpayer of an additional dollar of revenue raised through deductible state or local taxes is less than a dollar. If that lower cost for taxpayers encourages state and local governments to raise revenue from deductible sources, the reduction in federal tax will constitute an indirect federal subsidy of eligible taxes at the state or local level."

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