If you were a higher-income tax filer, the latest tax plan in the US Senate could add almost $1,500 to your taxes for next year, according to an analysis by the Institute on Taxation and Economic Policy. And that’s just the first part of the story. If we have a second part to tell, we’ll say that the price goes up for most everyone.
Here’s a recap of this portion of the analysis:
Here’s where the story starts: During the tax reform negotiations, the Senate proposed to nearly triple the standard deduction for singles and families to $12,000 and $24,000 respectively – doubling the deduction for filers who file jointly. This would disproportionately benefit middle-class Americans, while rewarding investments in the most affluent. But when the bills come up for a vote this week, they could effectively undo these reforms: the Senate plan would remove the deduction for state and local taxes. (Republicans in the House have the same idea.) That means that in many states, the itemized deduction would become more valuable for wealthier taxpayers. In Connecticut and New York, for example, it would raise the average itemized deduction by 50%.
If that sounds familiar, you are not alone. Senators made similar changes to the deductions for state and local taxes – getting rid of the itemized deduction for such taxes as income, property and sales tax and increasing the standard deduction in return. One of the biggest losers from this move was low-income residents, who would have been able to use the personal exemption to reduce their taxable income. Now they would lose that exemption entirely.
In these states, a personal exemption reduced the amount of taxes an individual could have been liable for, raising their after-tax income and helping to reduce their income tax liability. The tax system treats people differently according to the way they make their income. Tax bills can be as high as 25% or more in places with the highest rates in the country. It is hard for poor and middle-class families to afford expensive property taxes, let alone high state and local tax bills.
Senators are now proposing to undo almost all of the tax reform. That would be bad for working families. But it’s even worse for the budget deficit. In effect, they would be increasing the price of everything – prices for groceries, clothing, heating oil and utilities, hotel rooms, clothes, trips and all of the other staples – and making them all more expensive.
Plus, it is becoming increasingly clear that those who benefited the most from the higher standard deduction under the Senate plan would be the wealthiest.
In a recently released New York Times analysis, Jason Furman, a former chair of the White House Council of Economic Advisers, published the results of a survey he conducted of the United States. The results showed that 83% of those who would be beneficiaries of the higher standard deduction would be high-income taxpayers.
By excluding property taxes, proposed changes would disproportionately help the top 10% of households (those with incomes at least $730,000) the most. But in a low-incomes country like the United States, more than 70% of all taxpayers fall into that 10%. Here is how the share of the tax burden breaks down among the different income groups:
From these numbers, you can see why so many Americans, regardless of their income level, would likely be harmed by the Senate’s latest tax proposal.
In 2011, I wrote about how presidential vetoes of economic policies cut the short end of the stick for low-income households. Today, House tax reform will harm low-income taxpayers while increasing the prices and taxes on the stuff they need most – the basics for a healthy life.
Workers of all walks of life will end up paying the price of these policies. But so will those who are relatively more affluent – and in particular, middle-class families who do not have disposable income to spare.