November 9, 2017
Dear Member of Congress:
Reports that the Senate tax bill will fully eliminate the state and local tax (SALT) deduction should serve as a warning flare that, once compromised, this longstanding, principle-based deduction could become a piggy bank to finance other favored benefits. Indeed, House Members who support the leadership’s limited property tax deduction, and believe it may address the significant concerns of taxpayers who don’t want SALT taken away, should view the Senate bill as an ominous sign that any cut to the SALT deduction quickly becomes a slippery slope over which they have no control. One day SALT is partially eliminated, the next day it could be gone entirely.
Speaking of the partial elimination of SALT: there is a widespread misunderstanding of the impact of the $10,000 property tax limit in the current version of H.R. 1 that needs to be corrected. Taking New Jersey as an example, a new paper by the Institute on Taxation and Economic Policy (ITEP) concludes that nearly 1 million of the state’s households will no longer claim the property tax deduction under the House plan, a reduction of 60%, even with the allowance for a $10,000 deduction for property taxes.
As the paper explains:
“…much of this sharp decline can be explained by the fact that nearly 1.8 million New Jersey households would no longer be able to write-off their state income or sales taxes on their federal tax forms, as these deductions would be repealed entirely under the bill…. Despite having property taxes that could potentially be deducted under the House bill, many of these taxpayers would not deduct those taxes in practice because the combination of itemized deductions they are allowed to deduct (which would no longer include state income and sales taxes) would be smaller than the standard deduction. This would be a worse deal than current law for many taxpayers even though the House bill makes the standard deduction more generous.”
ITEP estimates that 12% of N.J. residents would see their tax bills rise next year, with that figure growing to 27% by 2027.
In fact, the doubling of the standard deduction does not make up for the repeal of state and local income and sales taxes, and neuters the use of the capped property tax deduction for many taxpayers. That is why the SALT provision in H.R. 1 gains so much revenue.
The U.S. Treasury Office of Tax Analysis estimates that the 10 year cost of the full state and local tax deduction (2017-2026) is $1.27 trillion, according to its tax expenditures report. The Joint Tax Committee recently estimated that the 10-year cost for the proposal to eliminate income and sales taxes, and subject property taxes to a $10,000 cap, is $1.1 trillion over 10 years. The difference between the two estimates, due solely to the restoration of property taxes with a $10,000 cap, is $170 billion or just 13% of the full deduction – meaning that the current SALT benefit would be slashed by 87% under the present House plan. The Institute on Taxation and Economic Policy (ITEP) came to an identical conclusion in its own recent report on the House plan, finding that the property-only deduction would eliminate 88% of the current SALT benefit.
The other critical question is who benefits from the severely restricted SALT deduction in the House plan. Interestingly, even with a $10,000 property tax cap, the ITEP analysis concludes that the middle class will be largely shut out. ITEP found that the middle 60% of the income distribution claiming the SALT deduction today would not take a property tax deduction under the House proposal, even with the deduction permitted up to $10,000. Conversely, for the top 1% of earners, only 13% of current claimants would no longer receive a property tax deduction under the House bill.
In sum, while H.R. 1 includes a capped property tax deduction, that benefit would be beyond reach and of no value to most taxpayers who itemize today, particularly in the middle class. The modest remaining benefit would skew mostly to wealthy taxpayers because of the interplay of various provisions in H.R. 1 that would significantly reduce the number of taxpayers who would itemize, particularly among the middle class.
House leadership is selling the capped property tax limit as a compromise, but the data indicates it is a phantom deduction for most middle-class taxpayers who currently claim this benefit, and a significant number of them will see their taxes rise as a result.
The bottom line is Members should not accept the simple and misleading claims put forth by advocates who argue your constituents will be protected because most of them currently deduct less than $10,000 in property taxes. That argument completely ignores how the House plan works for real taxpayers. It is a false representation about a phantom deduction for the middle class.
Before suburban homeowners are hurt by this phantom deduction, or Members see this compromise eviscerated by the Senate tax bill, House Members have an opportunity to protect SALT fully on the House floor. We urge you to preserve the full SALT deduction which has protected taxpayers against double taxation and the fiscal integrity of state and local governments for more than 100 years.