White House considers cutting state, local tax deduction

WASHINGTON — WASHINGTON - As President Bush lays the groundwork for a possible overhaul of the U.S. tax code, one option under consideration would deal its biggest financial blow to citizens of "blue" states such as California and New York.

Some conservative activists are urging the administration to scrap the federal deduction for state and local taxes as part of a broader plan to revamp the nation's tax system.


Although the proposal would hurt some taxpayers in nearly every state, it would hit hardest in states with higher-than-average income levels and bigger-than-average state and local tax burdens. High on the list are a number of states that supported Democrat John Kerry in last month's presidential election.

California and New York, for example, have top state income tax rates of 9.3 percent and 6.5 percent respectively; "red" states Florida and Texas, meanwhile, have no state income tax.


"There's no question this effort would punish blue states," said Rep. Robert T. Matsui, a California Democrat and member of the tax-writing House Ways and Means Committee.

Over time, Matsui said, such a measure could force state and local governments to cut spending.

That could occur if taxpayers, stung by the higher tax burden that would come from losing the deduction, demand a cut in local and state tax rates and become unwilling to approve increases.

Supporters of the change insist the disproportionate blue-state effect is a coincidence, but they acknowledge that the proposal could hurt most in the states in which the majority voted against Bush.

"Let me put it like this: It certainly isn't something that's a discouragement," said one prominent conservative. "Yes, we talked about this. The fact that it hits blue states is not something that's been missed among Republicans."

It remains unclear whether the Bush administration will adopt the proposal.

Some administration and congressional advisers said they believed the idea has been floated as a trial balloon.

The Los Angeles Times is a Tribune Publishing newspaper.