Over 90 percent of public education funding comes from state and local taxes. Having filed taxes and paid a certain amount (or had an amount returned), it’s important to know where that money goes.
On the local level, property taxes are set by municipal governments or school districts. States generate revenues from sales and income taxes. What might be overlooked is the deductibility of state and local taxes from federal income tax.
The Center on Education Policy (CEP) argues that these tax provisions help stimulate local and state governments’ ability to fund education at higher levels. The CEP concluded:
“State and local governments have depended on federal deductibility for many decades to bolster their ability to raise revenues. If this policy were changed or terminated, state and local governments could suddenly find it much harder to raise revenues for public education.”
These tax provisions, or tax expenditures, “reduce[s] the amount of tax revenues the federal government would otherwise have collected.” The higher that municipalities and states tax its residents, the more of a break they can receive from federal taxes. CEP conducted a complex study to analyze this phenomenon across the nation.
When looking at K-12 public education funding specifically, CEP found the system obtaining about $19 billion in benefits:
The Joint Tax Committee estimates that a total of $42.4 billion in benefits goes to public education through tax expenditures. The Office of Management and Budget has the figure at around $47.8 billion. Most of the money in tax expenditures goes to higher education.
The CEP cautions that detracting these deductibles could have unintended consequences:
“Over time, a change in special tax provisions, particularly the deduction for state and local taxes, could end up eroding funding for public education as much as a direct cut in federal, state, or local budgets.”
Tax reform is a hot topic in the midst of unsustainable national debt. However, tax deductions are a tricky aspect to tax policy that may produce unintended results. It’s hard to predict how money saved through deductions will be used, but tax provisions as discussed can give cities and states more autonomy to raise and spend tax revenue.