In all the blizzard of claims and counterclaims about the House and Senate tax bills the GOP is trying to rush through Congress by year’s end, one thing should be very clear: If you are a middle-class taxpayer who has reason to itemize your tax deductions, you could, the minute the bill becomes law, pay more than before. If those deductions involve state and local taxes and you live in a high-tax state, you may pay quite a bit more. And in fact, you could well decide to stop itemizing, which could be bad news for industries built around tax deductions, not to mention for the tax preparation biz.
This is all laid out pretty clearly in a large study of middle-class taxpayers (defined broadly as families with incomes ranging from $40,000 a year to about $125,ooo a year) conducted by the New York Times. Three-fourths of the taxpayers in this sample take the standard deduction and don’t itemize.
The Senate bill would roughly double the standard deduction: to $12,000 for an individual or $24,000 for married couples. As a result, most middle-class households that take the standard deduction now would get a tax cut under the bill in 2018, and almost none would get a tax increase.
The bill also cuts the personal exemption everyone gets while expanding the child tax credit. So itemizers without kids would be hit the hardest. But it’s those who heavily use the SALT deduction — concentrated especially in high-tax, high-income states like California, New York, and New Jersey (none of which have Republican senators) — who could really be the immediate losers here.
More than 40 million households wrote off a combined $350 billion in state and local income and sales taxes in 2015, according to the I.R.S., and 38 million households deducted close to $200 billion in property taxes. Both deductions would disappear under the Senate bill …
In total, about 40 percent of households that itemize their deductions would pay more in 2018 under the Senate bill — in some cases a lot more.
The Times analysis goes on to point out that most of the individual tax cuts in the Senate bill will expire by 2027 (in order to make the bill comply with budget rules), reversing nearly all of the middle-class tax benefits (a problem exacerbated by a change in the inflation adjustment for tax rates that does not expire). Republicans, of course, argue the budget picture will be so rosy by then, thanks to science-fiction levels of economic growth generated by happy job-creators, that Congress will find a way to extend the middle-class cuts. That remains to be seen, obviously. And the Times does not appear to consider the more subtle effects on the middle class of provisions like the elimination of the Obamacare insurance-purchasing mandate, which could reduce tax credits going to families who drop out of the individual insurance markets.
Aside from the direct effect on middle-class households that lose significant deductions like SALT, the likely shift to non-itemizing by taxpayers who no longer believe it’s worth the trouble could have an important indirect effect on the value of deductions that are preserved by the bill. That’s particularly true of the biggest deduction of them all, the write-off for mortgage interest. The Senate bill takes away a relatively small piece of the mortgage interest deduction (lowering the cap on mortgages eligible for the deduction from $1.1 million to $1 million). But it undermines utilization of the deduction massively by making non-itemization a better bet:
According to Zillow, 44% of homes in the U.S. are worth enough, and carry high enough tax bills, that a new buyer, borrowing 80% of the purchase price, would benefit from itemizing–that is deducting mortgage interest and taxes. Under the House plan, that 44% falls to just 12%; under the Senate plan it goes even lower–just 7% of new buyers would get any benefit from deducting mortgage interest.
That could have all sorts of difficult-to-predict implications for housing prices and the entire real-estate industry. And again, the effects would be most significant in the same high-tax, high-income areas the elimination of the SALT deduction would hit hard.
The thing to take away from this analysis of the Senate bill is that Republicans have not taken their usual route of buying off middle-class opposition to tax cuts for corporations and wealthy individuals by their own miniature set of across-the-board tax cuts. This time they are picking and choosing beneficiaries and targets within the middle class. Everybody understands that aside from an anxious set of blue-state House members who could be in deep trouble back home if the Senate bill were to become law, the GOP is happy to mess with the incomes of people unwise enough to live on the liberal coasts. The silver lining for many of these people will be that they can spend a lot less time doing their taxes.