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Location: Nashville, Tennessee, United States

5/19/2002

Fact-Checking Larry
Tim Mahar, a reader of this site from Manchester, sent me an email noting an obvious lie in Larry Daughtrey's column in the May 12 Tennessean.

Daughtrey's piece slammed conservative critics of the proposed state income tax: They make a lot of speeches about transferring power and money from Washington back to the states, but they ignore the fact that a state income tax would keep perhaps $2 billion in Tennessee's economy because it is deductible on federal tax forms.

Responds Mahar: "Federal tax deductibility amounting to $2 billion means that the underlying taxes deducted have to amount to at least $8 billion."

Mahar's right. And Daughtrey's claim that a state income tax "would keep perhaps $2 billion in Tennessee's economy" is just the latest lie published in the pro-income tax Tennessean.

Here's why:

The income tax itself will raise around $1 billion - federal deductibility couldn't possibly return a higher amount to taxpayers.

In fact, it will return much less than half. Federal deductibility of the income tax is not a dollar-for-dollar exchange. Taxpayers would deduct the amount of their state income tax from their federal taxable income. If they paid $1,000 in state income taxes and were in the federal 20 percent tax bracket, they'd see their bill from Uncle Sam cut by $200.

Thus, the proponents of the income tax want you to give up $1,000 to get $200.

Actually, you probably won't even get $200. Most Tennessee taxpayers don't itemize - and federal deductibility won't change that. Why not? Because most taxpayers do better by taking the standard deduction on the short forms than itemizing their 1040s. A state incomet tax won't change that.

The federal deductibility that income tax proponents hype is ... well, mostly hype.

Even if all state taxpayers were in the top tax bracket (most aren't) and even if all state taxpayers itemized their federal returns (most don't), a billion-dollar income tax such as the one proposed by Speaker Jimmy Naifeh can not possibly return more than $400 million to Tennessee taxpayers via federal deductibility.

Lyin' Larry's claim that the figure is "perhaps" five times as high is demonstrably absurd.