The cost of owning a house would increase for many Californians under President Trump’s tax proposal.
Trump’s long-anticipated overhaul lacks key details essential for meaningful evaluation, including how to pay for it and how the benefits would be distributed between the poor, middle-class and wealthy.
But it’s already clear that one provision disproportionately hurts high-tax states like California, New York and New Jersey that did not support Trump in the 2016 election: Trump aims to do away with the federal tax deduction for state and local income and property taxes.
There’s little disagreement that our federal tax system is in desperate need of simplification. But eliminating the write-off for state and local taxes, known as the SALT deduction, would reverse a policy that has been on the books since the inception of the federal income tax in 1913. The provision should only be tinkered with if the remainder of Trump’s reform measure fairly offsets the losses to taxpayers.
There was good reason for originally creating the SALT deduction, to avoid double-taxation. When people pay their state and local taxes, that money is no longer discretionary income and should not also be subject to federal taxes.
The opposing view is that the deduction has turned into a massive federal subsidy to state and local governments. Every time state or local government raises taxes by $100, someone in a 35 percent federal tax bracket pays $35 less to the federal government.
The deduction only benefits people who itemize on their federal tax returns. Nevertheless, for Californians the impact is huge. The Washington D.C.-based Tax Policy Center estimates elimination of the SALT deduction would increase federal revenues by $1.3 trillion over 10 years, of which about 18 percent would come from California alone.
That’s because the state has the largest number of taxpayers and some of the highest state and local tax rates in the nation.
Of great concern is the loss of the federal deduction for local property taxes. Californians pay real estate taxes of 1 percent of a property’s assessment. However, those assessments are driven by when the property was purchased and the high cost of real estate in California.
As a result, people who more recently purchased their houses pay disproportionately higher property taxes than long-term homeowners — and would be hurt more by Trump’s plan to do away with deductions for property taxes.
As for eliminating the federal deduction for state income taxes, high-income earners would be hurt the most. But those earning between $75,000 and $200,000 a year would also be significantly impacted. To what extent that would be offset by other parts of Trump’s tax plan is still unclear.
In coming weeks, we hope to see careful analyses in California of how elimination of the SALT deduction would affect the affordability of housing and the state’s economy.
The debate over the Trump tax plan has just begun. But punishing middle-class Californians is not the answer.
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