The Republican tax overhaul will not be the punishment expected by many residents of high-tax, Democrat-voting areas. Many of those who have the most to lose from the elimination of state and local tax deductions will actually come out ahead under either the House or Senate versions of the bills.
Many residents of places like New York City, which couple high taxes with high costs, fear the provisions of both bills that would eliminate or reduce the deductions they receive for the income and property taxes they pay locally. The Senate bill would preserve a property tax deduction up to $10,000.
The New York Times recently published an alarming story about the loss of the deduction, describing it as a “dagger aimed” at New York City and its neighbors. But closer scrutiny reveals that this is overwrought. Although some New Yorkers might lose under the GOP tax bill, many would win.
The average SALT deduction in Manhattan, New York’s wealthiest borough, is $60,400, according to a New York Times analysis of data from the Internal Revenue Service. But this is an average, not a median figure, meaning, it doesn’t describe what most or even many New Yorkers currently deduct. Instead, it describes the numerical average, a number that can be skewed by a few taxpayers with very, very high deductions.
A New Yorker with a state and local tax bill that high would need to have a very high income and a pricey home. To get a state and local tax deduction of that much, a resident of New York City with a $1 million home would need to earn around $500,000.
A taxpayer with that level of income would not be hurt by either the House or Senate bills. To the contrary, such taxpayers would stand to gain a good deal. Under current law, a taxpayer with $500,000 of income and $30,000 in annual mortgage interest payments on a $1 million home, would face a tax bill of around $130,000 — after the deduction for state and local taxes. The House bill would see this shrink to around $123,000. The Senate bill would shrink this to around $112,000.
In other words, the Senate bill would cut the tax bill of a person taking the average deduction by about 14 percent.
New Yorkers with more modest incomes will also come out ahead. A New Yorker earning $75,000 of income with annual mortgage payments of around $8,500 on a $250,000 home would owe around $6,450 under current law, after the state and local tax deduction. Under the House bill, this New Yorker would owe $6,120. The Senate bill is even better for this New Yorker, pushing the taxes owed down to $5,740, which means the Senate bill reduces this taxpayer’s bill by 11 percent.
It can be misleading to focus on one provision of a tax bill that broadly cuts taxes and eliminates deductions. As these examples show, lower tax rates for income brackets and a higher standard deduction can by far outweigh the loss of the deductions.
Many New Yorkers, in other words, would get a much better deal from the tax bill than they have been led to believe.