Keeping the Deduction for Property Taxes Could Harm the Very People It’s Meant to Help
Republican lawmakers have reportedly reached a deal to preserve the deduction for state and local property taxes while repealing the deduction for other state and local taxes as part of their proposed tax overhaul. The compromise is apparently intended to win the support of House Republicans from high-property-tax states like New Jersey and New York, who think that the deal is a good one for middle-class homeowners in their districts. But as Jed Graham points out in a nice article at Investors.com, preserving the property tax deduction as part of the Republican plan might have negative consequences for the very people that it’s intended to help. (I’m admittedly biased because the article cites and quotes me.)
As Graham observes, keeping the property tax deduction while repealing the rest of SALT will lead some states to shift from taxing income to taxing property. (Co-blogger Brian Galle has a nifty paper that uses a 2004 change in the federal deductibility of state and local sales taxes to show how subnational jurisdictions respond to the incentives generated by the federal tax code.) This isn’t to say that states with income taxes will repeal them outright — and some states, like California, will be constrained by constitutional limits on property tax increases. But we can probably expect to see at least a modest shift from income taxation to property taxation at the state level, as well as a shift from income taxation to property taxation at the local level in cities and counties that now tax income.
What does that mean for middle- and upper-middle-class households in places like New Jersey and New York? Well, with the new standard deduction for joint filers set at $24,000, a lot of them won’t be itemizing their deductions anyway. The effective real estate tax rate in New Jersey is 2.35% of home value; in New York, it’s 1.62%. That means that in New Jersey, you would need to have a home worth more than $1 million before property taxes would put you above the new standard deduction amount. (In New York, the figure is close to $1.5 million.) To be sure, taxpayers with less expensive homes still might clear the $24,000 threshold on the basis of property taxes plus mortgage interest and charitable contributions. But lots of couples with homes worth in the half-million-dollar range who already have paid down much of their mortgage and who don’t give huge sums to charity will find that the property tax deduction doesn’t help them a wit, because they’re better off taking the standard deduction instead. (Note that many of these are people who itemize their deductions now because their itemized deductions under the status quo — including state and local income taxes as well as property taxes, mortgage interest, charitable contributions, and various other s— clear the current threshold of $12,700.)
For those households, the primary effect of preserving the property deduction might be a higher property tax bill but no additional federal tax relief. And they’ll have Republican lawmakers like Tom Reed and Chris Collins of New York, who have pushed for the compromise, to thank for the higher tax bill. Those lawmakers might want to think again about whether they really want what they apparently got in the deal.
