By Ryan Ellis
In recent weeks, some House Republicans have said there is a “California problem” in tax reform. They are mistaken.
The Senate tax bill, which most anticipate is the baseline tax reform bill at this point, eliminates the state and local tax (SALT) deduction. There is a singular exception for up to $10,000 in real property tax payments.
These members from California say that the $10,000 property tax deduction exception to the general SALT repeal doesn’t help them enough and they need more SALT relief. Why? In California, unlike New York or New Jersey, property taxes aren’t sky-high. This is thanks to wise fiscal policy usually uncharacteristic of the Golden State. Prop 13 there limits the yearly growth in property taxes to 2 percent annually, provided a house is not sold.
According to the Tax Foundation, California has a property tax collection per capita of about $1400, 22nd in the nation. By comparison, New Jersey has a per capita property tax of almost $3100, highest in the country. New York isn’t far behind at nearly $2600, 5th in America.
The California House members say that they need the $10,000 exemption to apply to ALL of the SALT categories, not just property tax. Doing so would allow them to deduct up to $10,000 in state income tax and local property taxes, up to a $10,000 combined limit. This would be perilously expensive and endanger the overall tax reform package. This much is known.
But are the Members even right about this? The answer is a resounding “no.” At least not if you’re starting with the Senate bill, as most observers believe will be the case.
Let’s take Orange County, California. Using the very handy taxplancalculator.com, I examined families of four with two children at different income scenarios between $100,000 and $1,000,000 in adjusted gross income (AGI). In each case, I assumed they had a first year mortgage equal to the median income home price in Orange County of $700,000 (a very expensive mortgage even there) and an estimated property tax bill of $6000. Here is what resulted:
Tax Cut from Senate Bill (Assuming No AMT)
$100,000 $703
$150,000 $1797
$200,000 $1742
$250,000 $1883
$300,000 $2581
$350,000 $6255
$400,000 $7848
$450,000 $8243
$500,000 $5708
$600,000 -$37
$700,000 $392
$800,000 $517
$900,000 $643
$1,000,000 $768
As you can see, there is no “California problem” for these Members (unless they are concerned about the $600,000 tranche and its $37 tax hike). Why is this?
Many California families today cannot deduct SALT because they are in the AMT. 5 million Californians deducted their state and local taxes in the latest filing year. However, nearly 1 million of them had this deduction clawed back by the AMT. Still more had the deduction chopped down by the “Pease” itemized deduction phaseout. SALT is not as valuable to California as they think it is.
$10,000 is not a lot of deduction to worry about. We’ve already established that the property tax on a median income Orange County home is about $6000. That eats up most of the allowed SALT they want already. The extra $4000 is worth what in lower taxes? $1000? $1500? And it would have to be made up for with higher taxes elsewhere in the tax reform bill, so California taxpayers wouldn’t even see that.
The Senate bill creates four low income and middle class brackets from which Californians benefit. Through $320,000 of taxable income, Californians will benefit from super-low tax rates of:
10 percent
12 percent
22 percent
24 percent
Those are much lower tax brackets than today on the same taxable income.
The Senate bill doubles the child tax credit from $1000 to $2000 and makes it available to more Californians. Under current law, the child tax credit is limited to $1000 per child and begins to quickly phase out for a married couple at $110,000 AGI. The Senate bill doubles the child credit to $2000 per child and doesn’t start to phase it out until a married couple’s AGI hits $500,000.
The best benefit Californians should hope for is eliminating the AMT in conference committee. At the last minute to avoid parliamentary and budget problems, Senate tax writers resurrected the AMT. The good news is that there is a strong desire to remove it. If it is not removed, SALT will be unavailable again for many Californians, even the property tax-only variety.
That’s what Members from California ought to be looking for, not nickel and diming a SALT deduction they may never be able to deduct.
Learn more here.