Bruce Bartlett, on the adjoining page, reports that among the proposals for tax simplification being bandied about Washington is the elimination of the federal deduction for state and local taxes. New York City, which suffers the highest combined state and local tax burden in the country, benefits most from these deductions. The law may block the wealthiest New Yorkers from benefiting in full. Some must pay the alternative minimum tax and so don’t benefit at all from the state and local deductions. But for a large number of middle-income New Yorkers, the deductions lighten the burden their city and state governmental officials have created.

The Republicans in Washington who favor the deductions argue that we don’t want to tax the same income twice. But while we use similar deductions to encourage home ownership and charitable contributions, it doesn’t seem appropriate that we should use this device to encourage taxation. Or, to put it another way, it doesn’t seem that a state like New York should be rewarded for imposing higher taxes. Deductibility encourages states to impose higher tax rates than they might otherwise adopt. The deductions allow liberals to argue for more government services because any new programs financed by state and local taxes would in effect be subsidized by the federal government.

Certainly, any move to eliminate the state and local deductions must accompany more fundamental tax reform that yields a simpler, fairer, and flatter code. So it is important, as President Bush pushes ahead with his agenda, that the administration creates a system that punishes rather than rewards Albany and City Hall for imposing excessively high taxes. It may be, though, that we are seeing the beginning of what amounts to a game of chicken between Washington and Albany and City Hall over the question of taxation. This can only throw into sharper relief the urgency of the tax-reform movement in the Empire State and our nation’s biggest city.