The tax plan the Republicans pushed through at the end of last year was a grab bag of goodies for Republican donors. The centerpiece was of course the big tax for corporations, which included large reductions in the tax already owed on overseas profits. Also, the plan included massive gaming opportunities for people creating pass-through corporations, along with special treatment for the real estate and oil industry.
In addition, the Republicans decided to take a big swing at more liberal states like California and New York, which both provide better services to their residents and vote Democratic in national elections. This was the logic of limiting the size of the deduction for state and local taxes to $10,000.
In these states, with their high house prices, even upper middle-income people can reach this cap on their property taxes alone. That means that none of their state income taxes will be deductible.
The cap can be a modest hit even on a person earning $80,000 or $100,000 a year, who could be paying another $600 to $800 a year as a result of the cap. The loss of this deduction can be a large hit on a worker earning $200,000 and a very large hit on a person earning $500,000. In the former case, a state income tax liability of $9,000 would mean an increase in federal taxes of more than $2,000 due to the cap on the deduction. Someone earning $500,000 can pay more $24,000 in state taxes. The loss of the deduction would boost federal taxes by more than $8,000.
While this provision has the effect of substantially raising the relative burden for higher-income people living in high tax states, progressives should still be concerned. This provision also means it will be harder for liberal states to do things like provide quality child care, decent health care and free college…