The Treasury Department's proposal to eliminate the federal income tax deduction for state and local taxes could increase the financial burden on public educational systems by as much as $16 billion, according to a study by the American Federation of Teachers.
The deduction is indirectly the largest federal contribution to education, the group said. Eliminating it "would wipe out almost a decade" of increased local education spending and educational progress, said Albert Shanker, president of the 600,000-member teachers' union.
Shanker and Sen. Daniel Patrick Moynihan (D-N.Y.), whose state would be the hardest hit, said at a news conference last week that taxpayers losing the federal deduction would demand that their state and local governments reduce taxes correspondingly. They predicted a rash of new tax-reduction drives such as California's Proposition 13.
"These communities will be torn," Moynihan said, by competing factions demanding to cut or maintain school budgets.
Scrapping the deduction would cost taxpayers who itemize about $39 billion annually. Because that amount is saved by taxpayers, the AFT said, about $12.7 billion extra is spent on elementary and secondary schools and $3.8 billion on higher education.
"It will mean that people paying state and local taxes will be saying that a $100 tax increase is really a $100 tax increase, instead of $60 or $70," because of losing the deduction, Shanker said.
The Advisory Commission on Intergovernmental Relations has estimated that state and local governments would be pressured to cut spending by up to 8 percent, the AFT said.
The Treasury proposal is part of the "tax simplification" plan that would reduce tax rates while eliminating many deductions. Moynihan said the damage to local governments is a "hidden aspect" of the proposal to phase out the deduction by 1987.
Moynihan criticized President Reagan for proposing to abandon "cost-sharing" for education, which the senator said has been embodied in the tax code since its 1913 inception. "Here we have a genuine assault on a federal principle" of indirect educational assistance, he said.
AFT's state-by-state survey said loss of tax relief could cost localities an average of $271 for each student, ranging from a high in New York of $588 for each student to a low in Wyoming of $75. Maryland's loss would be third-highest at $541 for each student, while the District of Columbia ranks 10th at $440 and Virginia is 17th at $320.
The losses vary depending on the size of each state's personal income, percentage of taxpayers who itemize and the size of the state and local tax effort.