The GOP tax plan’s changes to deductions would hit people in blue states hard, with limits on popular tax deductions that would have the biggest effects on people with high property taxes and expensive homes.
The tax plan doubles the standard deduction to $24,000 for a married couple, meaning most people wouldn’t itemize their mortgage interest or property taxes. But for those who do, the popular mortgage interest deduction would be capped at $500,000 of the loan amount for home purchases made after Nov. 2, 2017, instead of the current $1 million cap.
The deduction of state and local property taxes would be capped at $10,000, and state and local income and sales taxes could no longer be deducted.
Some Republicans in blue states immediately expressed their opposition to the bill.
“I cannot support the current version of the tax bill because it will increase taxes for many of my constituents to subsidize tax cuts for the rest of the country,” Rep. Peter King, R-N.Y., said. “My job is to protect the taxpayers of Long Island and New York.”
Rep. Lee Zeldin, R-N.Y., said he could not support the bill because it didn’t keep the entire state and local tax deduction. “Eliminating the SALT deduction would be a geographic redistribution of wealth, picking winners and losers,” Zeldin said in a statement.
Both of the limits introduced in the tax plan are targeted at deductions popular in blue states. “If you live in New York City, where you pay high taxes and where the cost of housing is pretty high, this is a double whammy,” said Howard Gleckman, a senior fellow at the Urban-Brookings Tax Policy Center.
There aren’t many people with mortgages over $500,000 – only about 1 million mortgages, or about 5 percent of mortgages that originated between 2012 and 2014, according to an analysis by the United for Homes campaign, which advocates for changes to the mortgage interest deduction.
Those mortgages are most common in solidly blue states. The District of Columbia tops the list, with 27 percent of mortgages over $500,000, followed by Hawaii, California, New York, Connecticut, Virginia, New Jersey, Maryland, Massachusetts, Washington and Illinois.
“Anything that’s going to impact the sacred mortgage deduction is going to have a significant impact on home values here in Connecticut, and on excitement about owning a home,” said Scott Cooney, regional vice president for the Connecticut Association of Realtors.
An analysis by the conservative Tax Foundation found that capping the mortgage interest deduction would decrease the deficit by $319 billion over a decade. The Tax Foundation also found that limiting the deduction would have the biggest effect in raising the taxes of people at the top of the income distribution, with very modest effects for people in the middle.
For people who make between about $49,000 and $88,000 per year, the cap could reduce after-tax earnings by 0.05 percent.Tendayi Kapfidze, chief economist for LendingTree, said that the tax plan could create an incentive for people who already own homes that cost more than $500,000 to stay in them, since existing homes would be grandfathered in and the new deduction limit would apply only to new home purchases.
“Say you own an $800,000 house and you’re thinking of moving or trading up. If you sell your $800,000 house and buy a new $800,000 house, you’ve just gotten a new tax bill,” Kapfidze said.
The deduction for state and local property taxes is also more commonly used in blue states – although high-income taxpayers who pay the alternative minimum tax are already barred from taking advantage of the property tax deduction.
“Anytime you’re essentially targeting state and local taxes of any kind, we know that tends to zero in on the likes of New York, New Jersey, California – and those are states that some of the Republicans in Congress are hostile to – and it’s a convenient target,” said Mark Hamrick, a senior economic analyst at Bankrate.com.
An analysis by the Tax Foundation showed that 37 percent of filers in Connecticut took a property-tax deduction, followed by Maryland, New Jersey, Massachusetts, Virginia and Oregon.
“I think the basic thing to say about this tax bill is, like most tax bills, it is very political,” Gleckman said. “This is just moving stuff around, raising taxes on some people, cutting taxes on some people – it’s all political.”
The National Association of Realtors has already begun its fight against the bill, with 105,000 members contacting their members of Congress, according to Evan Liddiard, senior policy representative for federal taxation.
Liddiard pointed out that Republicans and Democrats alike live in areas with high property taxes or home values. “We’re worried about the effect on middle-class homeowners, and not what party they belong to,” Liddiard said.