How Much Is the State and Local Property Tax Deduction Worth?
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House Republicans are set to unveil their tax plan this week. Retaining a deduction for state and local property taxes promises to change the math.
WASHINGTON — Keeping a federal tax deduction in place for property taxes would erase a sizable chunk of money that would have otherwise been available to help offset tax rate cuts Republican lawmakers and President Trump are pushing for as part of a major tax code rewrite.
House Ways and Means Chairman Kevin Brady, a Texas Republican, has indicated that lawmakers are for now planning to leave the deduction for state and local property taxes intact. His comments come as House Republicans prepare to release a tax bill on Wednesday.
The state and local tax, or SALT, deduction now applies to state and local real estate property taxes, personal property taxes on items like cars and boats, income taxes and sales taxes. It’s seen as a fat target to help offset GOP-backed rate cuts for individuals and businesses.
Estimates from The Tax Policy Center show that an all-out repeal of the state and local tax deduction would boost federal revenue by about $1.3 trillion over a decade. Figures from the conservative-leaning Tax Foundation, peg that amount at $1.7 trillion or $1.8 trillion.
So if the deduction for real estate property taxes is left in place, and the rest of the SALT deduction is done away with, how does that change the math that undergirds the GOP tax plan?
Jared Walczak, a senior policy analyst with the Tax Foundation, said by phone Monday that, based on the group’s estimates, the real estate property tax deduction is worth 33.9 percent of the overall value of the SALT deduction.
That number is roughly in line with Tax Policy Center figures, which show state and local income taxes make up about 60 percent of state and local taxes deducted, real estate property taxes about 35 percent, and sales taxes and personal property together roughly 5 percent.
Lobbing off 33.9 percent from the Tax Policy Center estimate of $1.3 trillion, decreases it by about $440.7 billion, to around $859.3 billion. Do the same calculation with the Tax Foundation estimate and it drops by about $593.2 billion, to about $1.1 trillion.
That puts a big dent in the amount a total SALT repeal might have provided to cover rate cuts. Offsetting the cuts by eliminating tax breaks is significant because it would limit how much the tax plan adds to the federal budget deficit, which was $666 billion for fiscal year 2017. Total federal spending was about $3.9 trillion during that budget cycle, which ended Sept. 30.
State and local government groups have been fighting to keep the deduction fully in effect. They argue that doing away with it would amount to “double taxation” on taxpayers, and would also make it harder for states and localities to levy taxes of their own.
A coalition that includes organizations such as the National Governors Association, the U.S. Conference of Mayors and the National Association of Counties has voiced opposition to the plan Brady described to keep only the property tax component of the SALT deduction in place.
It wasn’t clear from Brady’s recent statements about preserving the “property tax” deduction whether he was referring to the deductions for both real estate and personal property—or just the one for real estate. A spokesperson for the Ways and Means Committee declined to clarify when asked about this by email on Monday. And several experts tracking the bill weren’t sure.
But Walczak, with the Tax Foundation, noted that, either way, personal property tax deductions are a fraction of income and real estate deductions.
“I don’t think most people are actually writing off their cars,” he said. Referring to the personal property tax deduction Walczak added: “Whether or not it’s retained I don’t think that it is actually particularly significant for most taxpayers.”
Bill Lucia is a Senior Reporter for Government Executive’s Route Fifty and is based in Washington, D.C.
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