House Republican leaders have offered to preserve the property tax deduction that benefits a huge swath of homeowners from California across America to the Carolinas.
But their plan could come with a hitch.
GOP tax-writers are considering some form of a cap on the deduction. Depending on how that cap is formulated, it could hit millions of residents across the country. The plan is expected to be formally unveiled Thursday.
“As of (now) the property tax deductibility is still in...it’s capped,” Rep. Tom MacArthur, R-N.J., told reporters at the Capitol Wednesday.
“I’m not going to mention what it is because we’re still talking about it, but I think it needs to go up,” he said of the cap.
About a quarter of all taxpayers took the property tax deduction in 2015, according to IRS data analyzed by the Tax Foundation.
Ending the deduction would be felt much more broadly than stopping the break for other state and local taxes. Both were included in House leaders’ initial proposal. Nearly a third of all taxpayers in Oregon, Minnesota and Utah claimed the deduction in 2015, for example, as well as roughly a quarter of tax filers in Missouri, Georgia, Washington, North Carolina and South Carolina.
Property taxes represent a greater share of expenses for people earning less than $500,000 than for those at the very top of the income scale, points out Jared Walczak, a senior policy analyst with the Tax Foundation.
“The key takeaway here is just that if they were going to compromise by retaining some portion of the state and local tax deduction, it would be most intuitive to retain the property tax deduction since all states benefit from it and it’s more middle class-oriented,” Walczak told McClatchy.
Because of their high taxes and high cost of living, New Jersey, New York and California benefit enormously from being able to deduct state and local taxes on their federal tax returns.
That’s why many Republicans from those states have balked at the proposal in the original September House GOP tax “framework” to do away with most itemized federal deductions, including for all state and local taxes.
Supporters of this approach argued most taxpayers will still save money thanks to a larger standard deduction and lower rates. “From my conservative point of view you should get rid of all of them,” Rep. George Holding, R-N.C., a Ways and Means member, said of the deductions.
The state and local tax breaks cost the federal government more than a $1 trillion over a decade “and I don’t think that’s fair,” Holding said. Keeping that money in the federal coffers is also crucial for balancing Republicans’ plans to cut billions in other individual and corporate taxes.
Those arguments haven’t convinced enough of the GOP holdouts, however.
So as a compromise, House Republican leaders have offered to keep a property tax deduction, but not the deduction for state and local income and sales taxes, Ways and Means Committee Chairman Kevin Brady, R-Texas, has confirmed. .
Republicans hope to move rapidly and have the House pass the bill by Thanksgiving. The goal is for the Senate to pass the bill in December, so that President Donald Trump can sign it early next year.
That’s an extremely ambitious timeline, notably because one of the biggest issues will be winning over enough Republicans from states where the loss of state and local income tax deductions sting the most. Much will ride on how tax-writers handle the property tax deduction.
Residents of the most populous states — with more expensive homes — claimed the most savings from the property tax deduction, and they would be the most affected by a proposed cap.
That’s particularly true in New Jersey and New York, where the deduction is worth more than $10,000, on average, in some counties. It’s worth an average of $5,000 for taxpayers in most of coastal California, southern Florida and metropolitan areas of Texas and Illinois.
It’s not surprising, then, that Republicans from New Jersey and New York have been the most vocal in their opposition of eliminating the property tax deduction as well as other state and local income taxes.
MacArthur said he was “willing to accept the concept [of a cap on property tax deductions] as long as it covers enough homes.” But Rep. Lee Zeldin, R-N.Y., told reporters he was holding out for a tax plan that preserves all state and local tax deductions. Ending them, he said, would amount to “a geographical redistribution of wealth that picks winners and losers.”
Just six states — California, New York, New Jersey, Illinois, Texas and Pennsylvania — together claimed more than half of all state and local tax deduction dollars in 2014, according to the Tax Foundation.
That has critics, even some from those states, arguing that taxpayers from elsewhere are in effect “subsidizing” these states and their high taxes. But all six still rank in the bottom half of states in terms of the amount of federal dollars they receive per capita.
In California, taxpayers saved roughly $112 billion by writing off all their state and local taxes in 2015. Of that, $28 billion came from the property tax deduction. “Retaining the property tax deduction is throwing us a bone but it is not enough,” California State Controller Betty Yee said in a statement to McClatchy.