Why ‘average’ homeowners in 32 states have something to fear from GOP tax plan

You’ve probably heard that residents in “rich,” high-tax coastal states like New York and California are getting badly screwed by the Republican tax bill that’s about to pass. What you haven’t heard is that plenty of people in decidedly not-rich places like Ohio, Arkansas, Nebraska, and even West Virginia will see their main tax deduction slashed, too. A lot more people will be swept up in this than the American public has been led to believe.

Tax bills are always confusing and full of competing claims, accompanied by neatly-twisted numbers presented by those who should very much know better.  Here’s the truth you should hear today: Millions of Americans are going to get very bad news when they figure out how this tax bill will impact them.  Here’s why.

Some fiscal conservatives, dating back to the Reagan era, have always seen federal deductions for state and local income taxes (SALT, or as I’ll call them, local taxes) as unfair and bad policy. They have a good argument. The deduction creates a bit of confusion for taxpayers about who they are really paying for what (give money to the mayor, get it back from Uncle Sam), and one can argue it encourages higher taxation at the local level. If we could go back in time, it wouldn’t be a terrible idea to never create this deduction in the first place.

However, there it is. We live with it now. People have made large, life-changing financial decisions around the existing tax code. Millions of them. This abrupt, radical, costly mid-course correction is wildly unfair to millions of them.  Here’s just one example of how this will play out:

“This house in Montclair, N.J. isn’t all that expensive at $399,000, and the schools are good…but the property taxes are $18,031.  We could never afford that,” says the husband in early 2016.  “But we can deduct that $18,031 right off our income for federal taxes,” responds his partner. “That will save us almost $5,000 in federal taxes. We can do it!”

(That’s a made up conversation, but a real house, by the way. )

So, when this new GOP bill passes, capping the local tax deduction at $10,000, the couple who made that brave, risky choice under the rules we all agreed to in 2016 will see their federal taxes soar. And to clear up some confusion, this family’s taxable income won’t rise by just $8,031.  Their local tax cap will have been met, so their state income taxes will now be fully taxable, too. If both partners work and the household earns $100,000, that’d be another $6,000 or so of federally taxable income.

Now, I know what you are thinking. Thank God you don’t live in Montclair, New Jersey! Or for that matter, in California, where state and local governments tax the residents way too high.  Serves ’em right!

You are saying that because you’ve been led to believe that you are very unlikely to suffer because of the loss of the state and local tax deduction.  That it really only impacts rich people.  You’ve been led to believe that by people who really, really would like to undo this deduction.

I know this because I keep seeing data points and quotes citing how many taxpayers will hit this local tax cap from property taxes alone — which is only about 4 million or so.  And they all seem to be rich, so who cares. Well, you should care.

Do yourself a quick favor right now and add up your state income tax and property tax and see how close you get to $10,000.  Taxes add up quickly!  If your quarterly property tax bill is $1,500 and your effective state income tax is in the 6% range at $80,000 household income, the GOP is about to take away some of your tax deduction.

So, how many Americans fall into that boat? I spent a lot of time this morning trying to find a good number for that, and it’s not easy. So I’m not even going to hazard a guess.  I am going to send up a flare to people in states where the AVERAGE state and local tax deduction is higher than or close to $10,000, however. Remember, anything over that amount will be newly taxable next year.  To be fair, these are averages — not medians, I couldn’t find those.  So they are skewed by people at the high end. A few people in multi-million dollar homes deducting $20,000 in property taxes can really distort an average.  So however tempted you might be to think that half the people in Georgia are losing SALT deductions, that’s not true.  It does seem reasonable to conclude that MANY people in a state where the average is higher than this new cap will be adversely impacted by it. Maybe you.

These numbers come from the Tax Policy Center.

Here’s the first thing to know: In 2015, the last year for which we have numbers, 43 million Americans took the local tax deduction.  The average deduction was $12,471.  So, on AVERAGE, across America, those 43 million Americans will be newly taxed on $2,471 worth of income.

So, in which states was the AVERAGE local tax deduction higher than this new cap? You might expect places like Connecticut and Washington D.C. and Illinois to be on that list. But it also includes Wisconsin, and Maryland, and Nebraska, and Minnesota, and Pennsylvania, and Oregon, and Iowa.  In all, 20 states AVERAGED more than $10,000 in local tax deductions.

That was 2015, however.  I think we can all concede that property and income taxes will be higher in many places next year, and in coming years.  So even places *near* the $10,000 cap will suffer from loss of this deduction soon.  When I threw the lasso around places where the average SALT deduction was $9,000, I roped in another 12 states. These include places like Arkansas, Kansas, Kentucky, and even Michigan.

Not rich coastal elites.

Again, these numbers have caveats, too.

In these states I’ve listed, only about 20-40% of residents itemize their taxes and take these deductions. So the averages only represent those who already deduct local taxes; roughly 60-80% of residents aren’t included in this math, and they will see their standard deduction rise, meaning they will see a tax benefit.

It will be paid for largely by loss of the local tax deduction.

Why pick one group over another like this?  I’ll let you decide. My main concern is the dramatic, intentional mis-casting of this tax code change as only impacting rich people and those jerks in New York and California. That’s far from true. In some of these places, other changes in this tax law might compensate for loss the increase in taxable income — the calculations are complex and individual, so I couldn’t find a decent number to really identify winners and losers.  Here’s my best shot at that.

My main beef is this: Radically changing the rules on homeowners like this is unfair. People sign up for 30-year mortgages to buy homes, making long-term financial plans as they do.  It’s unfair to pull the rug out from them like this.

There will be other unintended consequences for this change, too. The conservative National Review notes here that it’s going to destabilize local governments, who might end up having to pay more to borrow money because of it. For those of you who somehow think this is a fine way to teach a lesson to over-taxing local governments, and it’s time to stop subsidizing them, you are misguided. Take a moment to browse a state-by-state list of givers and takers before you make such claims. States like New York and California pay far more to Uncle Sam than they get back from him; places like Alabama and South Carolina take much more from the federal government than they pay in taxes.

Let me be clear: I see the logic of attacking this tax deduction. Were it part of a radical tax reform with meaningful changes across the board, I could stomach it.  Better still: Were this change phased in somehow so it only impacted new buyers, I’d have no problem with it. People would make different plans.

Instead, in a desperate effort to enact a pet project by desperately desired by eggheads, the GOP is pulling the rug out from under a lot of American homeowners.  Do the math now, before you are unpleasantly surprised next year.

Places where the cap on local tax deductions will hurt average taxpayers who itemize.

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