GOP grapples with tax winners, losers
Affluent voters in suburbs here could feel bite
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.
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.