In a move which appears to be unabashed, unmitigated gall, the Bush administration is floating the idea of eliminating federal income tax deductions for state and local taxes paid. The trial balloon comes but a few weeks after the Congress made state and local sales tax paid deductible for federal income tax purposes.

Unnamed administration officials have carefully avoided any specifics, but anyone who has paid any attention to any thing this administration has done over the last four years should immediately jump to the conclusion that the deduction for state and local income tax paid will be cancelled, but the the deduction for sales tax paid will continue. Such a move could only be seen as yet another sop to the teat-suckling red states who couldn't maintain first-world living conditions without over taxing the blue states.

Cutting taxes for the rich, again, is simply galling. Cutting taxes for the rich while raising taxes on the middle class is unabashedly galling. Cutting taxes for the rich while raising taxes on the middle class residents of liberal-minded states is the apotheosis of unmitigated, unabashed gall.

The Bush administration is eyeing an overhaul of the tax code that would drastically cut, if not eliminate, taxes on savings and investment, but it is unlikely to try to replace the existing tax code with a single flat income tax rate or a national sales tax, according to several sources familiar with ongoing tax deliberations.

The changes are meant to be revenue-neutral. To pay for them, the administration is considering eliminating the deduction of state and local taxes on federal income tax returns and scrapping the business tax deduction for employer-provided health insurance, the advisers said.

To pay for those large tax cuts, the administration is looking at eliminating both the deduction for state and local taxes, and the business tax deduction for employer-sponsored health insurance. That would raise nearly $926 billion over five years, according to White House and congressional documents.

Eliminating the state and local tax deduction, for example, would allow the administration to scuttle the alternative minimum tax and raise an extra $400 billion over 10 years, said Leonard E. Burman, a tax policy expert at the Urban Institute. That would be twice what the White House needs to fund the planned tax-free savings accounts, expanded retirement savings accounts and tax-free health savings accounts.

Advocates say that the current tax system is unfair since it allows a federal tax deduction for state and local income and property taxes. This is an accurate assertion. States that rely on sales taxes are disadvantaged by the current system. But two wrongs do not make a right. The best way to remove this inequity is to disallow special deductions for all state and local taxes, particularly income taxes. States would then be treated equally, and the internal revenue code would not be a tool to promote higher taxes at the state and local level. It is important to understand, though, that removing the special tax preference for state and local income taxes should not occur in a vacuum. Instead, because this reform would result in about $500 billion of higher taxes over a ten-year period, it should be linked to tax reforms that reduce tax revenue by a similar amount. Instead of trying to “make a right with two wrongs,” this would be akin to killing two birds with one stone.