The tax overhaul House Republicans unveiled Thursday keeps the mortgage interest deduction, as promised. But it adds a cap for new home buyers, who would only be able to deduct the interest for the first $500,000 of their mortgage.
That would hit hard in California, where the average home price now hovers around half a million dollars, more than any other state. Only Washington, D.C. has a higher average home price according to 2017 data compiled by real estate website Trulia.com. Realtors and homeowner associations immediately criticized the plan as a devastating blow to home ownership in places with higher housing costs.
The cap on the mortgage interest deduction comes on top of other provisions in the bill to do away with the federal deduction for state and local income taxes. Under pressure from lawmakers from high-cost, high-tax states, Republican tax writers opted to preserve the property tax deduction but the proposal caps it at $10,000. All told, that would be a blow to states like California, New York and New Jersey, who benefit the most from state and local tax write-offs.
Ways and Means Committee Chairman Kevin Brady, House Republicans’ point man for the tax bill, insisted in a briefing Thursday that even taxpayers from urban areas with high costs of living would benefit from the legislation. Speaking on Capitol Hill, Brady emphasized how the bill will help the middle class through lower individual tax rates, a doubling of the standard deduction and a new “family tax credit” that increases the child tax credit and adds $300 credits for each parent and non-child dependent.
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“Because of where we set the income tax relief brackets, this increased family credit...because we’re retaining property, mortgage and charitable (deductions), there is tax relief for Americans regardless of where they live,” Brady told reporters. “We’ve been working with our lawmakers from high tax states to work through and show them where tax relief continues all through their neighborhoods.”
He declined to say whether any taxpayers will face tax increases. But high home prices and high state income taxes mean some Californians might get bigger federal income tax bills, even with the lower tax rates proposed in the House bill.
In the Bay Area, for example, the median home sale price in September was $852,230, according to the California Association of Realtors. If buyers obtain a mortgage of roughly $700,000 to buy such a house, they would be able to write off the interest paid on only the first $500,000. And average property tax deductions on the San Francisco peninsula were more than $9,000 in 2015, according to IRS data compiled by the Tax Foundation. Under the bill, homeowners would not be able to write off property tax they paid exceeding $10,000. In Orange County, the median sale price was $799,000 in September, while the average 2015 property tax deduction was $6,285.
The National Association of Home Builders was critical of the House Republican plan even before the details were announced Thursday. It’s main complaint was that the larger standard deduction reduces the incentives to buy a home that currently exist in the tax code. In California, the mortgage interest deduction cap would be a further blow to the housing industry. “From what we have seen so far, limiting the mortgage interest deduction to $500,000 will no doubt hurt homeownership in states with high housing costs such as California,” California Association of Realtors President Geoff McIntosh said in a statement.
The legislation’s authors are aiming to do away with most itemized deductions as part of an ambitious overhaul of the federal tax code. The last time Congress passed such a comprehensive tax rewrite was under President Ronald Reagan in 1986. Supporters of the House bill argue eliminating things like the state and local income tax deduction will help streamline tax filing and make the system fairer.
Getting rid of those write-offs will also cover the cost of their proposals to dramatically lower individual and corporate tax rates. Eliminating all state and local tax deductions, as House Republicans initially proposed in September, would save the federal government $1.8 trillion over a decade.
House Republicans plan to begin committee consideration of their tax bill next week, with the goal of passing the legislation out of the chamber by Thanksgiving. Senate Republicans are preparing to introduce their own tax proposal in the coming weeks. The hope is to get a consensus bill on President Donald Trump’s desk early in the new year.
That’s an extremely ambitious timeline. Much will ride on whether Republican leaders can win over members from high-tax states, many of whom face tough reelection races in 2018.
But for some California Republicans, the trade-offs in the House bill are, potentially, worth it. “It is much improved over the initial version,” Rep. Tom McClintock, R-Elk Grove, told McClatchy Thursday afternoon. “I’d prefer that they kept in all of the income and property tax deductions” and “retained (the mortgage interest deduction) intact,” McClintock said.
“But we’re not voting on individual components we’re voting on an entire package, and as far as I can see so far, the entire package is very positive for California families and extremely positive for the American economy.”
Democrats blasted the plan as an attack on the middle class. House Majority Leader Nancy Pelosi of California called it a “shell game.”