GOP grap­ples with tax win­ners, losers

Af­flu­ent vot­ers in sub­urbs here could feel bite

Houston Chronicle - - FRONT PAGE - By Kevin Diaz

WASH­ING­TON — Asked to de­fine the mid­dle class, Texas U.S. Rep. Kevin Brady, the top tax writer in Congress, told re­porters re­cently that the an­swer de­pends on where you live.

The land­mark GOP tax bill headed for a House vote Thurs­day re­flects that neb­u­lous and hy­per-lo­cal cal­cu­lus. It would dis­trib­ute promised mid­dle-class tax re­lief un­evenly among dif­fer­ent states and even ZIP codes, with re­gional dis­par­i­ties based largely on how com­mu­ni­ties han­dle state and lo­cal sales taxes.

Much of the crit­i­cism has come from Democrats and Repub­li­cans in high-tax, Demo­cratic-lean­ing states like Cal­i­for­nia, Illi­nois and New York that could ac­tu­ally see their over­all tax bur­dens rise.

But the ef­fects also might be seen in Hous­ton and other parts of Texas, a state with no in­come tax but com­par­a­tively high prop­erty taxes, par­tic­u­larly in

the more af­flu­ent sub­urbs rep­re­sented by GOP law­mak­ers such as Brady.

Repub­li­cans lead­ers look­ing for the first ma­jor leg­isla­tive achieve­ment of Pres­i­dent Don­ald Trump’s pres­i­dency have largely co­a­lesced around the prom­ise of tax re­form. But con­cerns about adding to the na­tion’s long-term deficits have forced choices on tax writ­ers that could put them in a pre­car­i­ous po­si­tion with one of their tra­di­tional con­stituen­cies: af­flu­ent subur­ban vot­ers.

In the endgame of the tax de­bate in Congress, Brady, chair­man of the Ways and Means Com­mit­tee, said the eco­nomic stim­u­lus of broad, across-the-board in­di­vid­ual and busi­ness tax cuts will make everybody “bet­ter off,” even if some see tax in­creases.

‘Typ­i­cal’ fam­ily

Press­ing their case, Brady and other Repub­li­can lead­ers in Congress are count­ing on a sys­tem of lower tax rates and in­creases in the stan­dard de­duc­tion, among other ben­e­fits. They pre­dict that the “typ­i­cal Amer­i­can fam­ily” will re­ceive a $1,182 tax cut un­der the House bill. Fam­i­lies with chil­dren will do even bet­ter.

They also prom­ise nearly a mil­lion new jobs and a $4,000 av­er­age wage in­crease, though a Tax Foun­da­tion es­ti­mate of wage in­creases un­der a Se­nate ver­sion of the bill es­ti­mates the af­ter-tax in­crease for a mid­dle-class fam­ily in Texas at $2,558.

A num­ber of other out­side analy­ses show that mil­lions of Amer­i­cans in some in­come groups could see a tax in­crease un­der both the House and Se­nate ver­sions of the tax leg­is­la­tion, which dif­fer in how far they go to limit or re­peal state and lo­cal tax de­duc­tions.

Some stud­ies show those most likely to be hit with tax in­creases are in high-in­come ar­eas that ben­e­fit the most un­der cur­rent rules al­low­ing tax­pay­ers to fully deduct lo­cal real es­tate, sales and in­come taxes, as well as mort­gage in­ter­est paid on their homes.

Nearly a fifth of the subur­ban ZIP codes in Brady’s 8th Con­gres­sional District could face av­er­age tax in­creases of $339 next year, ac­cord­ing to an anal­y­sis based on Gov­ern­ment Fi­nance Of­fi­cers As­so­ci­a­tion mod­els us­ing 2015 IRS tax data. The same study shows that res­i­dents could see in­creases av­er­ag­ing $458 in sought-af­ter mar­kets like the up­town area of Hous­ton, part of a ZIP code with $555,700 me­dian home val­ues in the heart of a po­ten­tially com­pet­i­tive con­gres­sional district rep­re­sented by Repub­li­can John Culberson.

Culberson’s of­fice did not re­spond to re­quests for com­ment. But Brady said he dis­putes the study’s con­clu­sions and a sim­i­lar anal­y­sis by the Tax Pol­icy Cen­ter, a project of the Ur­ban In­sti­tute and Brook­ings In­sti­tu­tion. That study pro­jected that un­der the House plan at least 7 per­cent of U.S. tax­pay­ers would pay higher taxes in 2018, and at least 25 per­cent would pay more by 2027, at the end of the cur­rent 10-year bud­get win­dow.

Some of the di­min­ished sav­ings would re­sult from the ex­pi­ra­tion of some GOP pro­posed write-offs, such as a pro­posed $300 fam­ily credit, which would be phased out to de­crease the bud­get deficit.

“I ex­pect to see tax re­lief at ev­ery in­come level in my district,” said Brady, rep­re­sent­ing a district with a $92,000 av­er­age house­hold in­come. “I dis­agree with the analy­ses. Too of­ten they ig­nore the in­crease in pay­checks . ... At the end of the day, when this bill gets to the pres­i­dent’s desk, ev­ery Amer­i­can will be bet­ter off be­cause of it.”

Brady and White House bud­get of­fi­cials ar­gue that the loss of cer­tain pop­u­lar prop­erty write-offs in the cur­rent tax code will be com­pen­sated by low­er­ing rates into four com­pressed tax brack­ets, along with dou­bling of the stan­dard de­duc­tion to $24,000 for mar­ried cou­ples, ex­panded child tax cred­its and the tem­po­rary $300 credit for non-child de­pen­dents.

But a num­ber of Repub­li­cans, in­clud­ing Texas U.S. Sen. Ted Cruz, have said it could be a “mis­take” if the GOP tax re­form ef­fort re­sults in tax in­creases for peo­ple in high-tax states or any­where else.

“I think tax re­form needs to cut taxes for everybody,” Cruz told re­porters at a press con­fer­ence last week.

Tax cuts for all?

The GOP’s dilemma came into sharper fo­cus af­ter last week’s gu­ber­na­to­rial elec­tion in Vir­ginia, where Repub­li­cans suf­fered de­feats up and down the bal­lot, in­clud­ing in well­heeled subur­ban dis­tricts out­side Wash­ing­ton.

House Speaker Paul Ryan said the mes­sage to subur­ban vot­ers who stand to lose their state and lo­cal tax de­duc­tions is to “take a look at the bill in to­tal­ity … When you take the thing all in its to­tal­ity, what the anal­y­sis shows us (is) … the av­er­age house­holds at ev­ery in­come level see a tax cut.”

But in­di­vid­ual cir­cum­stances will still mat­ter, par­tic­u­larly fam­ily size. For ex­am­ple, the Tax Pol­icy Cen­ter anal­y­sis notes that ex­pand­ing the child tax credit from $1,000 to $1,600, even with the ex­tra $300 fam­ily credit, would not make up for the loss of the cur­rent per­sonal ex­emp­tion of $4,050 in ev­ery fam­ily cir­cum­stance.

Democrats, uni­formly op­posed to the House GOP tax plan, also have fo­cused on the in­come dis­par­i­ties in the pro­posed tax cuts. While most analy­ses show that taxes, on av­er­age, would de­cline across all in­come groups, some also show that higher-in­come tax­pay­ers would gen­er­ally re­ceive larger cuts as a per­cent­age of their in­come.

Peo­ple in the mid­dle fifth of in­come, those earn­ing be­tween $48,000 and $86,000, would re­ceive an av­er­age tax cut in 2018 of about $800, ac­cord­ing to the Tax Pol­icy Cen­ter. That com­pares to those in the top 1 per­cent, peo­ple who make more than $730,000, who would re­ceive av­er­age tax cuts of about $37,000.

While the su­per-wealthy 0.1 per­cent would do even bet­ter, the merely af­flu­ent or fi­nan­cially sta­ble could see the gains from lower fed­eral tax rates all but wiped out if the new tax for­mu­las don’t cover their lost state and lo­cal tax de­duc­tions. An­a­lysts say that is es­pe­cially true in high tax states like New Jer­sey, New York and Cal­i­for­nia, that levy high but fully-de­ductible in­come taxes.

About a half-dozen Repub­li­can law­mak­ers in those states have said they might vote against the GOP bill, though that still leaves Brady an­other dozen or more Repub­li­can votes to spare to pass the House.

No Texas Repub­li­cans have come out against the tax bill, though the re­gional cal­cu­la­tions could make a dif­fer­ence to con­stituents in a state where more than 2.8 mil­lion tax­pay­ers write off some com­bi­na­tion of their sales, real es­tate taxes, and mort­gage in­ter­est.

In Har­ris County, nearly a half-mil­lion peo­ple item­ized their taxes, ac­cord­ing to 2015 IRS data. Of those, 380,420 claimed the prop­erty tax de­duc­tion, more than half of them tax­pay­ers with ad­justed gross in­comes over $100,000. Nearly 330,000 county res­i­dents also wrote off their mort­gage in­ter­est.

In Brady’s district, nearly a third of all tax fil­ers — 30 per­cent — claimed the state and lo­cal tax de­duc­tion in 2014. For Culberson, whose 7th District en­com­passes parts of the west side of Har­ris County, the fig­ure was 28.4 per­cent, ac­cord­ing to the Tax Pol­icy Cen­ter.

Dif­fer on de­tails

In one late com­pro­mise for Brady, the House bill main­tains the prop­erty tax de­duc­tion but caps it at $10,000. The bill also would pre­serve the mort­gage in­ter­est de­duc­tion, though it would ap­ply only to the first $500,000 of a loan.

The Se­nate bill, how­ever, re­peals all the cur­rent state and lo­cal tax de­duc­tions, in­clud­ing the prop­erty tax de­duc­tion, though it re­tains the write-off for mort­gage in­ter­est, a pro­vi­sion that many deem crit­i­cal to the real es­tate mar­ket.

White House Of­fice of Man­age­ment and Bud­get Di­rec­tor Mick Mul­vaney said Tues­day that Trump would sign ei­ther ver­sion.

While they dif­fer on the de­tails, Repub­li­can tax writ­ers say that re­mov­ing “loop­holes,” no mat­ter how cher­ished, will push more to­ward the stan­dard de­duc­tion, mean­ing they don’t have to item­ize their tax re­turns.

But a dis­pro­por­tion­ately large share of those who might lose the prop­erty tax de­duc­tion, even with the $10,000 cap in place, will come from the mid­dle class, ac­cord­ing to an anal­y­sis by the In­sti­tute on Tax­a­tion and Eco­nomic Pol­icy.

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