REPUBLICANS have spent years talking about the need to cut and simplify taxes. In June 2016 Paul Ryan, the Speaker of the House of Representatives, released a plan to do so. President Donald Trump released no fewer than three tax plans during his campaign for office. In September the administration championed an outline sketch it had agreed with Republican leaders in Congress. Yet as The Economist went to press, Republicans had delayed the release of their tax bill by a day, having failed to iron out the details.

The main problem the party will face as the legislation moves through Congress is finding the money to pay for tax cuts. Republicans like to talk about abolishing tax deductions, but every loophole has a lobbyist to defend it. Having given up on deficit-neutral reform, Congress has budgeted for the tax package to increase the deficit by $1.5trn. But the Tax Policy Centre, a think-tank, puts the likely cost of the package $2.4trn. The main source of revenue Republicans hope to bank comes from scrapping the “state and local” deduction. This exempts, from federal taxes, money used to pay state and local tax bills. Even getting rid of this is proving difficult.

As long as there have been federal income taxes, there has been a state and local deduction. It first appeared in the Revenue Act of 1862, which financed the civil war, according to Jared Walczak of the Tax Foundation, a think-tank. Federal income tax was eventually found to be unconstitutional. When, after a constitutional amendment, lawmakers recreated it in 1913, they recreated the deduction, too. The idea was to stop the federal government from monopolising states’ tax revenue.

Republicans have since come to view the state and local deduction as something that encourages big government, rather than deterring it. It subsidises Democratic-leaning states that set their taxes high. (In New York the deduction is worth about 9% of taxable incomes, compared with just 2.5% in Texas.) In 1985 President Ronald Reagan proposed getting rid of the deduction, while acknowledging its status as “the most sacred of cows” in the tax code.

Oiling the wheels

Yet the deduction survived Reagan’s tax reform in 1986. Lawmakers from highly taxed states formed an unlikely alliance with the oil lobby, which was concerned about losing its own tax breaks. Each special interest supported the other. The state and local deduction stayed, and the oil lobby won some concessions.

Will today’s Republicans succeed where Reagan failed? An analysis by Bloomberg in September found that there are 52 Republican lawmakers whose constituents benefit disproportionately from the deduction. Concern about scrapping it is one reason the Republican’s budget outline, which opened the door to tax reform, only squeaked through the House by four votes (Republicans have a majority of 45). In an attempt to pacify dissenters, Kevin Brady, chairman of the Ways & Means committee, has since proposed keeping the deduction in place for property taxes.

That would reshape, rather than eliminate, the distorted incentives the deduction causes. These are twofold. First, the deduction encourages states to tax and spend more than they otherwise might, because when they do, some of the costs fall on the federal taxpayers. Second, in its current form the deduction encourages states to use property and income taxes when sales taxes might be better. (Taxpayers can only deduct one of income and sales taxes, and generally it is easier and more beneficial to pick income taxes.)

Property taxes account for about one-third of state and local deductions taken, by cost. Whereas seven states have no income tax at all, all 50 levy significant property taxes, so the benefits of this part of the deduction are more spread around. Maintaining it would disproportionately benefit some Republican-leaning states like Texas. But that limits the attraction of Mr Brady’s offer to Republican lawmakers from Democratic-leaning states like California, New York and New Jersey.

Eliminating the state and local deduction would, all else equal, make federal taxes more progressive. In 2014 nearly 90% of the benefits of the state and local deduction as a whole flowed to those with incomes over $100,000. The deduction’s regressive effects has more to do with income than property taxes, according to the Tax Foundation. This is because as high-earners get richer, they tend to pay a higher proportion of their earnings in local income taxes, but a lower proportion on property taxes. So the deduction for income taxes is more important to them.

Despite its regressive nature, many on the left like the state and local deduction, income taxes included. The Centre on Budget and Policy Priorities, a left-leaning think-tank, argues that the deduction makes it politically easier for states to levy higher taxes on the rich, thereby increasing government spending. Moreover, local taxes fund services such as education and roads, which are already under strain because of tight budgets.

Yet states are surely capable of balancing their budgets without receiving a federal subsidy for doing so. There is no real justification for distorting their fiscal decisions one way or the other. For that reason, the Republicans’ final tax bill will be better if it curbs the state and local deduction. And a partial repeal would be better than none at all.