As the details of the House version of the long-awaited Trump tax bill roll out, all sorts of putative “winners” and “losers” are being identified. Without question, some of the biggest losers will be the New Yorkers and Californians who would no longer be able to deduct interest on high-end mortgages, or deduct their state and local sales and income taxes.
The draft bill halves the cap on the mortgage interest deduction. Now the deduction will be limited to interest on the first $500,000 of a mortgage, as opposed to the current $1 million cap. And it entirely eliminates all but the property-tax portion of the state and local tax (SALT) deduction.
These are reasonably big-ticket items from a revenue point of view (the lowered cap on mortgage-interest deductions would raise about $300 billion, and eliminating the non-property tax SALT deduction would raise $1.2 trillion), with the pain concentrated significantly on states with both high real-estate costs and high state and local income taxes. That means, preeminently, New York and California.
According to the most recent (2012–2014) available data, here are the locales where over 30 percent of new mortgages are over $500,000: Marin, C.A. (47 percent), New York, N.Y. (46 percent), San Francisco, C.A. (46 percent), San Mateo, C.A. (43 percent), Falls Church City, V.A. (37 percent), Santa Clara, C.A. (36 percent), and Arlington, V.A. (32 percent). That’s Manhattan plus metropolitan San Francisco and Washington.
As for the SALT changes, New York and California together would bear nearly a third of the cost of eliminating SALT altogether. And though maintaining the deduction for property taxes will cushion the blow for people in states like New Jersey where property taxes take the biggest bite from incomes, those in high-cost, high income-tax states — again, preeminently New York and California — will feel much of the pain. These states don’t have any Republican senators, but they do have GOP House members, and the New Yorkers led a revolt against the House plan early on that could still cause trouble.
More broadly, House GOP tax writers led by Ways and Means chairman Kevin Brady chose to pick their fights carefully in the proposed bill. Bending to the president’s preferences, they went for a full and immediate reduction in the corporate tax rate from 35 percent to 20 percent. They did not lower the top income tax rate — it will stay at 39.6 percent — though they slightly raised the threshold for income subject to that rate. They also headed off a line of attack by introducing safeguards to keep a proposed sharp reduction in tax rates for “pass-through” business income from becoming a giant loophole. Income from law and financial-consulting firms will be taxed at the current individual rates unless they can make the case it reflects significant capital investments. New rules letting businesses fully “expense” their capital expenditures, and limitations of corporate interest write-offs, are in the bill, but the details are hazy. And the sponsors backed off a proposal to reduce the allowable tax-deferred deductions to popular 401(k) plans.
The bill immediately doubles the amount of inherited wealth that is exempt from the estate tax and then eliminates it entirely in 2024. It also eliminates the alternative minimum tax, that great nemesis of high-income taxpayers with good accountants adept at sheltering income. Balancing these big giveaways to the very wealthy are “sweeteners” for the middle class, principally a doubling of the standard deduction, an increase in the child tax credit, and a temporary new credit that will replace personal exemptions. The standard deduction boost, moreover, is useful in arguing that with fewer itemizers, otherwise painful deduction limits like the ones on SALT and mortgage interest will affect fewer taxpayers.
There will be a lot of arguments over the math of the overall bill, and whether it actually meets the requirements of the budget resolution in “only” boosting deficits by $1.5 trillion. But most likely, Republicans will take a hard line on big revenue raisers like SALT that don’t affect that many people in that many states. The mortgage-interest-deduction limits, on the other hand, could be bargain-bait for a homebuilders’ and Realtors’ lobby already opposed to the standard-deduction boost that erodes the value of interest deductions, and disappointed tax-writers did not include a new tax credit for homeowners.
All in all, this bill is not especially friendly to bicoastal folk who aren’t big corporate shareholders, and it remains fragile because it can’t lose too many revenue raisers without collapsing altogether. And it has a long way to go in reaching the president’s desk.