The seven states without an income tax are obviously less impacted by the GOP’s proposed elimination of deductibility for state and local income tax. But what is less evident is how it actually helps homeowners in those states. Homeowners in those states benefit from eliminating that deduction because property taxes — which remain deductible — tend to be much higher in states without an income tax.
Texas is a good example. People who move to states like Texas because they don’t have an income tax are fooling themselves, because state government has to get its money from somewhere, and property tax is a common replacement for funds that an income tax would generate.
Colorado’s property taxes on residential properties are quite low compared to other states, and one reason is that our state has an income tax in addition to state and local sales taxes. Coloradans were hurt when the deductibility of sales tax was eliminated, and elimination of the income tax deduction would add to that hurt. Meanwhile, homeowners in states that get most of their general funds through property taxes would hardly feel it at all.
It doesn’t seem fair, does it? Of course, a large number of Congress members, including Republicans, are from states with income taxes, making passage of the GOP tax bill as written difficult at best.
Overlooked in most discussions of tax reform is the progressive nature of the mortgage interest deduction, and I’m heartened that, under the GOP plan, it would remain in place for mortgages under $1 million. Another tax proposal that is not getting as much coverage as it should is the proposed elimination of the estate tax. Currently, estates under $5 million are exempt from estate tax. Instead of entirely eliminating this tax, how about raising the exemption to, say, $10 million? This would preserve the intent of the current law, which is to provide relief for family farmers and others who may have a large non-cash estate which would have to be liquidated by heirs to pay the inheritance tax. At the same time, exempting only the first $10 million would mean that billionaires could not pass their entire fortune to their children without those children paying a single penny on their inheritance. I disagree with those who refer to this as a death tax. Instead, I view it as a tax on unearned income (on a grand scale) and believe that it is quite reasonable to require the beneficiaries of such windfalls to pay taxes on it.