With all the attention being paid to the federal budget and the sequester, tax policy has come under scrutiny. One issue that briefly received attention was the possibility that Congress would end the federal income tax deduction for the state income tax. The New York Times and NPR commented on the impact of such a change in policy. In brief, the repeal of the deduction would not only reverse a tax policy that has existed as long as the federal income tax, but would impose greater burdens on residents in states with high income tax rates. It could be argued that this policy change would threaten state policies that support the needy; it could also weaken state autonomy to determine state policy.
As was noted by both NPR and the Times, the basis of the state income tax deduction is to exempt the portion of individual income that was paid in taxes from being taxed as income—in effect, to avoid double taxation. States that impose an income tax on its residents find it easier to get acceptance of the taxes since they are exempt. But the exemption also amounts to a subsidy from the federal government to the states. What’s more, this subsidy is larger for those states that impose higher taxes to fund programs that provide more support to the needy. In other words, the subsidy is greatest for those states that believe in the effectiveness of a strong government. 
The problem is that the state income tax deduction is estimated to cost the federal government about $70 billion a year. In the search for more sources of revenue, both Congress and the President have suggested that the state income tax exemption could use another look, either by capping federal tax deductions, which would impact more people in high tax states, or by repealing the exemption.
However, repealing or limiting the exemption could increase pressure to reduce state tax rates, limiting the ability of states to fund many state programs. As the Times argues,
The deduction is Washington’s way of supporting states that support their most vulnerable citizens and neediest cities. The seven states that account for 90 percent of state and local tax deductions (including sales and property taxes) — New York, New Jersey, California, Pennsylvania, Maryland, Illinois and Massachusetts — generally do a better job of providing for the health and welfare of their citizens, and are more willing to pay for institutions that are good for society as a whole.
As such, it could be argued that repealing the exemption would have a deleterious effect on the states’ abilities to adopt and shape their policies. The policy also reflects a “balance between the federal government and the states.” After all, as the Chief Justice Marshall so famously noted, “the power to tax is the power to destroy.” So could repeal of the state income tax deduction be challenged as an unconstitutional infringement on the state’s powers and the federal system?
 For the stories, see NPR, “Day 8 of 12 Days of Tax Deductions,” http://www.npr.org/2012/12/19/167600157/day-8-of-12-days-of-tax-deductions and New York Times, “Keep the State Tax Deduction, “ http://www.nytimes.com/2012/12/07/opinion/keep-the-state-tax-deduction.html
 To see a nice map of the relative value of the state income tax deduction, see http://taxfoundation.org/blog/monday-map-state-income-and-sales-tax-deductions accessed 2/28/13
 NPR, “Day 8”
 New York Times, “Keep the State Tax Deduction”