Middle-class homeowners have reason to be skeptical of Washington’s latest promise of tax cuts for the middle class.
As you may have heard, a group of leaders in Washington, known as the “Big Six” and including House Speaker Paul Ryan, R-Janesville, recently unveiled their framework for tax reform. Their No. 1 promise was tax cuts for the middle class.
Unfortunately, on closer inspection, it appears many middle-income homeowners will see their taxes go up, not down, under the Big Six plan.
A big reason why is that this plan takes away the most popular — and one of the most valuable — deductions for households, which is widely taken by middle-income homeowners: the deduction for state and local taxes.
The state and local tax deduction is claimed by 44 million American households on their federal returns, a large percentage of whom are middle-class homeowners. Nonetheless, Washington has this deduction in its crosshairs because eliminating it raises $1.6 trillion over 10 years that tax writers can use to fund other tax breaks, some of which have nothing to do with the middle class. In other words, as Willie Sutton once infamously said in explaining why he robbed banks, Washington is targeting this deduction because this is where so much middle-class money is.
Generations of hardworking homeowners have counted on our longstanding tax policies to help make a middle-class life possible. Now Washington proposes to pull the rug out from under middle-class homeowners by terminating the “financial contract” homeowners have depended on, and that could cost millions of homeowners a lot of money. For other taxpayers who rent today, the proposal may delay or eliminate their opportunity to purchase a home in the future.
Here’s why: if the current proposal becomes law, many homeowners who itemize deductions today, including mortgage interest, may not qualify to itemize on their federal tax return in the future without the state and local tax deduction. As a result, an analysis prepared by the National Association of Realtors found that homeowners with average gross income between $50,000 to $200,000 would see their taxes go up with an average increase of $815 under a such a proposal — even if the standard deduction were doubled. Furthermore, the NAR found that housing values might drop about 10 percent because tax reform would increase the after-tax cost of housing and dampen demand.
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NAR’s warning is consistent with another recent analysis performed by the independent Urban-Brookings Tax Policy Center. The center’s analysis similarly concluded that nearly 30 percent of taxpayers with incomes between $50,000 and $150,000 — a group that includes a high percentage of homeowners — would see a tax increase under the proposed plan, due in part to the elimination of the deduction for state and local taxes.
None of this should be a surprise to Washington. There is a very close correlation between the middle class, the state and local tax deduction, and homeownership. About 35 million households claim the mortgage interest deduction on their federal taxes and three-fourths of them have incomes between $50,000 and $200,000. Among the 44 million taxpayers who claim the state and local tax deduction, nearly 86 percent have incomes under $200,000. So any proposal that takes away some or all of the state and local tax deduction is going to hurt the middle class and the millions of homeowners who work hard every day to maintain this standard of living.
Equally important, taking away the state and local tax deduction puts at risk the tax base that supports public-sector services and vital investments here in Madison and Wisconsin and across the country, including solid infrastructure, reliable public safety and schools — services and support that benefit all taxpayers in communities across the entire country.
All of this helps to explain why the state and local tax deduction has been in the federal tax code for more than 100 years, since the permanent income tax was first imposed. As one of only six deductions back in 1913, it was designed to prevent taxpayers from paying a second tax on income they already paid taxes on, and protect the fiscal integrity of state and local governments that provide vital public services in our federal system of government. It also furthered the goal of promoting homeownership by enabling homeowners to deduct their property taxes in addition to the separate deduction for mortgage interest.
Eliminating the deduction would result in a triple whammy for many middle-class taxpayers: higher taxes, lower home values, and fewer public services that make communities vibrant and attractive places to live.
Every organization representing state and local governments and public-service providers, including both Republicans and Democrats, opposes the elimination of state and local tax deduction as part of tax reform. The deduction has served the nation’s citizens well for more than a century. Washington should stay true to history and middle-class homeowners and preserve it.