House Republicans will unveil tax legislation this week that likely allows taxpayers to continue to write off their property taxes, but not their state and local income and sales taxes.
That’s good news for California homeowners, who received billions back from the IRS in 2015 thanks to the property tax deduction. But it’s still far less than what California taxpayers will lose by no longer being able to deduct other state and local taxes, which are some of the highest in the country.
According to IRS data, Californians saved roughly $112 billion by writing off all their state and local taxes in 2015. Of that, $28 billion came from the property tax deduction. Nationally, that deduction accounted for just over one-third of all state and local taxes deducted that year, according to the Tax Foundation, a center-right think tank in Washington, D.C.
The original House GOP tax “framework” unveiled in September proposed doing away with all state and local tax deductions, as well as most other itemized federal deductions except for charitable donations and mortgage interest. The party’s tax writers argued most taxpayers will still save money thanks to a larger standard deduction and lower rates. Ending the deduction would also save the federal government $1.8 trillion over a decade, which is crucial for balancing out the revenue loss from Republicans’ plan to cut billions in taxes.
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But the proposal alarmed House Republicans in high-income, high-tax states like New York, New Jersey and California, who have been furiously negotiating to save it amid fears of political fallout back home.
The property tax deduction was likely preserved because it benefits the middle class more than other state and local tax deductions. That’s because property taxes represent a greater share of income for people earning less than $500,000 than it does for those at the very top of the income scale, points out Jared Walczak, a senior analyst with the Tax Foundation.
The ratio of property taxes to income is particularly high in coastal areas of California and around Lake Tahoe. And Orange County, where Republicans are fighting to hold onto three congressional districts in 2018, features some of the highest property tax-to-income rates in the state and country.
The impact on middle-income Americans is an important selling point for Republicans, who are trying to pitch their plan as a boon for the middle class. Democrats, meanwhile, point out that the vast majority of the benefits from the proposed tax overhaul benefit the top 1 percent of wealthiest Americans. And they’re already seizing on the deal to end state and local income tax deductions as yet another indication that the middle class will get short shrift in this plan. House Minority Leader Nancy Pelosi labeled it a “double tax” on middle class families’ income that “shows the fundamental rottenness at the core of their tax bill.”
California Republicans counter that the state’s Democrats are to blame for the so-called “double tax.” In an exchange with Gov. Jerry Brown last week, San Diego-area Rep. Darrell Issa claimed the state and local tax deduction has ”only become of such importance as a direct result of the tremendous weight that your misguided policies have put on California taxpayers.” Brown had written the state’s Republican delegation earlier in the week, urging them not to help advance the GOP’s tax plan as part of a budget vote. All 14 Republican members of Congress voted for the budget, anyway.
After releasing their draft of the tax bill this week, Republicans hope to move rapidly to hold a committee vote and pass the bill out of the House before Thanksgiving. The goal is for the Senate to then pass the bill in December, getting it to President Trump to sign early in the new year. That’s an extremely ambitious – and optimistic – timeline, however. And one of the biggest issues will be winning over enough Republicans from states where the loss of state and local income tax deductions sting the most. House Ways and Means Committee Chairman Kevin Brady, R-Texas, said the bill would retain the property tax deduction, but the GOP late Tuesday canceled the bill unveiling scheduled for Wednesday, citing unidentified outstanding issues.
The tax overhaul has put Issa and other California Republicans facing tough re-election races in a particularly tight spot. On the one hand, they are eager to support tax cuts, something the party’s base is clamoring for. They’re also desperate to notch a legislative victory after failing repeal and replace Obamacare, as Republicans had been promising for years. But the state and local tax deductions disproportionately benefit California and a handful of other high-income, high-tax states. Issa, who represents northern San Diego county, Los Angeles-area Rep. Steve Knight and Orange County Reps. Dana Rohrabacher, Ed Royce and Mimi Walters all represent areas with high costs of living – and they’re all being targeted by Democrats in 2018.
Unlike Republicans from New York and New Jersey, who have been openly critical of the original House tax proposal, most in California’s GOP delegation have yet to weigh in publicly on the measure. Of the those facing re-election fights, only Rohrabacher has come out unequivocally in support of ending all state and local tax deductions. The rest have been awaiting the final draft of the legislation before taking a stance. Now that the bill is written, they are on the spot.
Emily Cadei, McClatchy Washington Bureau: @emilycadei