Tax season is upon us and many taxpayers are discovering the
changes to the tax code that were generated by the tax reform bill passed in
December 2017. While most taxpayers will find at least modest savings from the
new tax law, a growing number of filers are learning that they will pay more
this year and they aren’t happy.
reform law contains several features that lowered taxes for many Americans.
The law kept the seven tax brackets that existed previously but lowered the tax
rates. The new law also almost doubled the standard deduction and increased the
child tax credit. The problem for many taxpayers, especially in blue states, is
that the lower rates and higher standard deduction are not enough to offset the
caps that were placed on the deductions for state and local taxes (SALT) and
Under the old law, state and local property, income, and
sales taxes were generally fully deductible. Tax reform capped the deductible
portion of those taxes at $10,000. The new law also lowered the amount of mortgage
interest that can be deducted from a principal
amount of $1 million to $750,000. The new limits to these deductions are
hitting middle and upper-class taxpayers in blue states hard.
Many of the
irate taxpayers are blue collar workers who claim to have voted Republican.
For example, Nycgirl tweeted to the White House:
a veteran and Catholic, tweeted angrily to the GOP:
These tweets and others like them are easy to find as people
get their W-2s and start to work on their 2018 tax returns. Especially for
taxpayers in states with high property taxes and home values, many are finding
that, with no other changes, tax reform has eliminated their tax refunds and
left them with tax bills due. For many taxpayers, the list of deductions lost
is greater than the increase in the standard deduction.
For example, in California, the median house value is now more
than $600,000 which means that almost half of California homeowners cannot
deduct all of their mortgage interest. If a home buyer takes out a mortgage for
$1 million at five percent interest, the interest payments for the first year
would total just under $50,000. Under the new tax law, more than $10,000 of
that interest would no longer be deductible.
The problem is compounded by state and local property taxes.
California doesn’t have the highest property tax rates (the state is actually
35th), but due to the high price of housing there, the average
property tax is $4,783 per USA
Today. Northeast and Rust Belt states have even higher property tax rates.
New Jersey has both the highest rates and the highest average tax at 2.31
percent and $8,477 respectively. New Jersey’s property tax alone almost reaches
the cap for state and local tax deductions.
But wait, as they say, there’s more. Only a handful
of states don’t have their own income taxes. In many cases, the states that
have high property taxes also have high income
tax rates. In addition, there are taxes on other personal property, such as
cars, as well as income taxes levied by cities and counties. There is a long
list of cities, many in red states, that take their own share of income
When all these taxes are added up, the tally is more than
$10,000 for many Americans. These taxpayers have just lost thousands of dollars
in deductions and that drives up the federal income tax that they owe. Last
September, the General Accounting Office warned that as many as 4.5
million taxpayers could end up having to write checks to the IRS unless
they increased the amount of the tax withheld from their paychecks.
There is a tendency for conservatives to dismiss concerns
about the loss of these deductions because they primarily affect blue states,
but that is not necessarily a safe assumption. The Tax Foundation published an interactive map that shows which areas benefit most from state and
local tax deductions. As it turns out, even swing and red states have pockets
of high tax areas.
While California was a large beneficiary of the deductions, Fulton
County, Georgia had a higher average SALT deduction
claimed ($5,814) than Los Angeles County ($5,405). Delaware County, the
home of Columbus, in the must-win swing state of Ohio had an average SALT
deduction of ($7,674). Other counties in Rust Belt states carried narrowly by
Donald Trump in 2016 are also heavily impacted by the loss of the deduction. These
include the Philadelphia suburbs of Montgomery and Bucks Counties, the Milwaukee
suburbs of Waukesha and Dane Counties, and the Detroit suburb of Oakland and Washtenaw Counties.
The big question is whether the Republican tax increase on blue
state voters would be enough to affect the outcome of an election. The answer
is that it may already have. The Republican rout in the suburbs last year may have
been at least partly due to those voters who were aware that their deductions
for taxes and mortgage interest would be
curtailed this year. Among the Republican losses in 2018 were six
seats in the Los Angeles suburb of Orange County where the average SALT deduction
was $6,569, among the highest in the nation. A Republican stronghold just a few
years ago, Orange County is now completely dominated by Democrats. Many other
suburban districts, often characterized by high property values and high-income
voters, flipped from Republican to Democrat as well.
The tax reform bill was well-intended and provided a boost
to the economy, but an unintended consequence was raising taxes on millions of
voters in swing states and districts. That policy error may have combined with
other factors to make 2018’s
blue wave a reality even before most voters knew that they were paying more
in taxes. If the error isn’t corrected, things could get worse in 2020 with
millions more who saw their tax refunds turn into tax bills. Even though the
assumption is that the 2020 election will be a referendum on Donald Trump, many
swing voters may turn out to vote their pocketbooks against the party that
increased their taxes.