THE GOP TAX REFORM BILL AND LOCAL TAXES, IGNORE THE IGNORANT

By Michael Gaffney

 

This is just a quick and not needlessly overdetailed analysis of the local effect of tax reform using Worcester and Shrewsbury as examples. There has been some nonsense being bantered about by those with a political agenda concerning the loss of tax deductions for payments on local real estate taxes that has some residents concerned.

First off, SALT stands for State and Local Taxes. So the SALT deduction is the amount you write off each year from your Federal Taxes for the amount you paid in state and local taxes.

As per CNN Money 12/20/2017

The final bill will preserve the state and local tax deduction for anyone who itemizes, but it will cap the amount that may be deducted at $10,000. Today the deduction is unlimited for your state and local property taxes plus income or sales taxes. . .

Residents in the vast majority of counties across the country claim an average SALT deduction below $10,000, according to the Tax Foundation. So for low- and middle-income families who currently itemize because of their SALT deduction, they’re likely to take the much higher standard deduction under the bill if it becomes law, unless their total itemized deductions, including SALT, top $12,000 if single or $24,000 if married filing jointly.

The SALT deduction also includes some sales taxes as well, but again, the effort here is not to dive too far into discussions of the tax code. The point is, for the majority of filers take the standard deduction. As we will see, locally the tax reform bill won’t result in a loss of deductions for the majority of filers.

Because the argument is that the new tax code benefits the “wealthy”, I grabbed this information from an article from Factcheck.org:

Thirty percent of tax filers itemize, rather than claiming the standard tax deduction, and 95 percent of them claimed a state and local tax deduction in 2014, according to the Tax Foundation. The same figures held for 2015, when 44.7 million tax filers claimed itemized deductions on their returns, according to IRS data. Higher-income households are more likely to itemize, so they are more likely to claim the deduction. “About 10 percent of tax filers with incomes less than $50,000 claimed the SALT deduction in 2014, compared with about 81 percent of tax filers with incomes exceeding $100,000,” the Tax Policy Center says in a brief on the topic.

 “The $10,000 cap would of course limit the benefit for the highest income earners,” Jared Walczak, a senior policy analyst at the Tax Foundation, told us in an email. “At the average U.S. effective property tax rate of 1.08%, a home would have to be worth nearly $926,000 before the property tax deduction is reached. Under current law, however, a very significant percentage of filers with homes above that amount are already subject to the alternative minimum tax, which eliminates the benefit of the state and local tax deduction.”

As the data indicates, limiting the SALT deduction to $10,000.00 is more likely to reduce the deduction for those making more money. Hence, the “wealthy” will pay more.

But let’s look at things locally and compare Worcester to Shrewsbury.

Here are the tax rates for Worcester and Shrewsbury:

Worcester $18.91 per $1,000.00

Shrewsbury $12.83 per $1,000.00

(Based on the tax rates the maximum value of your home in Worcester before you hit the $10,000.00 SALT deduction limit is $520,000.00. In Shrewsbury, that value is $780,000.00.)

According to Trulia the median home value in Worcester and Shrewsbury is:

Median home in Worcester $217,000.00

Median home in Shrewsbury $396,100.00

Here is the residential real estate tax bill based on the tax rate and median home price:

Worcester = $4,103.47 per year ($217,000.00 x 18.91 per $1,000.00)

Shrewsbury = $5,081.96 per year ($396,100 x $12.83 per $1,000.00)

But as SALT includes state taxes, we must look further. Massachusetts income tax rate is 5.1%. The median house hold income for Worcester and Shrewsbury is:

Worcester income $46,105.00

Shrewsbury income $97,365.00

So, based on median income, we multiply the state tax rate by the median income:

Worcester’s median income tax is $2,351.35

Shrewsbury’s median income tax is $4,965.62

The net result on the SALT deduction using median income and median home values is:

SALT for average in Worcester is $6,454.82

SALT for average in Shrewsbury is $10,047.58

So, at the end of the day, the reduction in the SALT deduction would not theoretically hit a Worcester resident, but would result in a $47.58 “tax loss” to a Shrewsbury resident.

But then again, the standard deduction has increased to $12,000 for individuals and $24,000 for couples. So, the Shrewsbury resident can simply use the standard deduction and thus there is no change. The tax code is complex and full of exceptions, but for the overwhelming majority of our local residents, there is nothing to fear.