The Facts on Tax Reform, Till Kingdom Come, and Grassy “Know-it-All”
Here’s What You Need To Know
Yesterday, House Republicans unveiled the detailed draft of their long-awaited tax reform legislation, which will be marked up by the House Ways and Means Committee on Monday. Even before it was released, Republican efforts on tax reform have been slammed by Democrats as a “middle-class con job,” “a cruel joke,” and kicking “working families to the curb.” This oppositional messaging will only grow louder as Democrats try to scuttle the bill from passing Congress and reaching the President’s desk.
As The Washington Post noted yesterday, “In their haste to condemn the GOP tax plan, Democrats have spread far and wide the false claim that families making less than $86,100 on average will face a hefty tax hike. Actually, it’s the opposite. Most families in that income range would get a tax cut.” To help clear your confusion as the tax reform battle heats up, here are the facts on what it means for Americans’ bottom line:
- It’s The Brackets, Stupid: Republicans are reducing the number of tax brackets from seven to four – 12%, 25%, 35%, and 39.6% – and moving most Americans into a smaller bracket than they are in now. Nearly 80% of households will be in the 12% bracket or pay no income taxes. Yet many are concerned they will pay more because the headlines are focused on which deductions are being eliminated or capped. That’s the wrong focus. The plan works because it broadens the tax base by removing or curtailing deductions and taxing that larger tax base at a lower rate. So the focus shouldn’t be on what is happening to which deductions, but at what new (and in most cases lower) rate Americans will be taxed.
- The Standard Deduction: Overall, the bill raises the standard individual deduction to $12,000 from the current rate of $6,350, and the standard deduction for a married couple to $24,000, from $12,700. However, in the spirit of simplification, the new system will eliminate the personal exemption, so it is not quite the near-doubling that it seems at first. Still, taxpayers will get a larger standard deduction than they have now and more taxpayers will opt for this easier filing mechanism that will reduce the more than $20 billion and 1.35 billion hours it already costs Americans to file their taxes. In addition, the child tax credit will increase from $1,000 to $1,600 per child up to 14 years of age, and add a $300 credit for each parent and, for the first time, include a $300 credit for non-child dependents as well. The income level at which the child tax credit is phased out will also nearly double.
- The Mortgage Interest Deduction: After initially backing the tax reform framework that said the GOP plan “retains tax incentives for home mortgage interest,” homebuilders shifted, becoming some of the plan’s staunchest opponents over worries about the potential negative impact that dis-incentivizing homeownership could have on their bottom line. Since the homebuilders dropped their support of the framework, the newly released draft bill reduces the level of loans for which interest can be deducted from $1 million to $500,000 on new loans, meaning current homeowners would still retain their current deduction. Given the median new home price in the U.S. is currently around $320,000, this reduced cap will only impact buyers in expensive housing markets or at the high-end of the real estate market.
- The State and Local Taxes (SALT) Deduction: This itemized deduction allows taxpayers to deduct state/local property taxes and either state income or sales taxes, but it generally benefits wealthy residents of high-tax states – and blue-state politicians who can raise taxes and have the federal government soften the blow to their constituents’ wallets. Last-minute legislative maneuvering is satisfying some concerns on this issue, allowing a deduction for property taxes to remain in place, with a cap of $10,000. However, according to analysis by ATTOM Data Solutions, the average American household’s property tax bill is $3,296, and “there were nine counties in the country with a population of at least 100,000 that had average annual property taxes of more than $10,000,” meaning most households will not be affected by the proposed cap.
- Surely Someone Pays More? No tax reform will work for every single household, and some will end up with higher tax bills under this plan. Those earning between $260,000 and $425,000 are most vulnerable at first blush, given the small upward shift in their tax bracket. However, removing the alternative minimum tax, increasing and expanding the child tax credit, and lower rates on the first $260,000 of their earnings should protect many of those high-earning households.
The stakes are high given Republicans’ failure to repeal Obamacare, and Democrats are hoping to convince Americans they’re going to pay more so the rich and big corporations can pay less. The above facts will help you understand that their rhetoric does not quite match the reality.
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