South By North Strategies, Ltd.

A new report from the Institute on Taxation and Economic Policy argues that states  should reform the ways in which they use itemized tax deductions. Notes the report:

Each of the itemized deductions allowed by states are frequently defended as an important means of offsetting large household expenses that reduce a family’s ability to pay taxes. But because low-income families rarely have potentially deductible expenses that exceed the basic standard deduction amount, the ability to itemize offers little or no tax cuts to fixed-income families. And, because itemized deductions are structured as deductions from taxable income, they typically provide much larger tax breaks to the best-off families than to middle-income taxpayers. This is because the tax cut you get from an itemized deduction depends on your federal income tax rate: imagine two New York families, each of which has $10,000 in mortgage interest payments that they include in their itemized deductions. If the first family is a middle income family paying at the 15 percent federal tax rate, the most they can expect is a $1,500 federal tax cut from this deduction ($10,000 times 15 percent). But if the second family is much wealthier and pays at the 35 percent top rate, they could expect a tax cut of up to $3,500 from this deduction, even though they spent exactly the same amount on mortgage interest as the first family. It is unlikely that a lawmaker would ever propose a direct spending program designed to make home-ownership more affordable that excluded low income families entirely and gave the biggest subsidies to the richest families—yet that is the inexorable impact of itemized deductions.