From The Washington Business Journal:
Greater Washington’s high median income should have set up the region to reap more than its share of $1.5 trillion in tax cuts passed by Congress and signed by President Donald Trump this month — but the region’s high real estate values will blunt its impact for many regional taxpayers.
The D.C. metro area reported a high median household income of more than $95,000 in 2016 (compared to a national median of $57,000). And while taxpayers in the middle of the pack will receive a tax cut of a few hundred dollars, those in the top 1 percent will see an average cut of $55,000, according to an analysis the Institute on Taxation and Economic Policy.
The legislation, however, ends some important deductions for real estate, which will hit Greater Washington residents much harder in the checking account, according to experts.
Those include:
- The decrease of the mortgage interest deduction cap from $1 million to $750,000, which will affect far more homes than before (although existing homes are grandfathered in), especially in the D.C. region. Three neighborhoods in D.C., including Georgetown, Friendship and Cathedral Heights, all have a 2017 median sale price above that cap. McLean had an median sale price of $872,750 and Glen Echo, Chevy Chase, Potomac, Cabin John, Bethesda and Garret Park in Maryland all had median sale prices above $750,000.
- A $10,000 limitation on deducting state and local states. Taxpayers used to be able to deduct local income and property taxes with no limit, but will now be capped at $10,000. That has spurred a rush in Greater Washington of people looking to prepay, although that will only work under certain circumstances, according to the IRS. Considering the median property tax bill in the Greater Washington suburbs hovers between $4,000 and $6,000 (not counting income tax), it’s clear that many will feel the cap on deductions.
- The elimination of the home equity line of credit deduction. Homeowners used to be able to deduct the interest paid on their home equity line of credit, but that’s prohibited under the new bill. The deduction made lines of credit popular for things like car purchases and home renovations and allowed people with high home values and significant home equity to tap their value under favorable tax terms.
“This is a big hit, especially for people in this area,” said Cliff Rossi, a professor and executive-in-residence at the University of Maryland’s Robert H. Smith School of Business, adding that ultimately those with more money will receive bigger breaks than those with lower incomes. “They are going to feel a little bit of extra pocket money whereas people in the higher income brackets are going to get a pretty sizeable reduction in their tax burden.”
Those tax windfalls come primarily from the lowering of corporate taxes and on what are called “pass through” businesses (allowing those who earn income through them to deduct 20 percent). Lower earners will primarily benefit from a doubling of the “standard exemption” for those that don’t normally itemize, which will increase from $12,000 for married couples to $24,000.
But there is another limitation in addition to high property values, according to local economist Stephen Fuller, head of the Stephen S. Fuller Institute at George Mason University. Since so much of regional spending comes from the federal government (roughly one-third), changes in the tax code meant to reward private companies will lack the punch they will have in other cities.
“The Washington region is not as well-positioned as other metropolitan-area economies to benefit from this new investment or the associated business activity accruing directly to businesses; being a ‘company town’ reduces the Washington region’s ability to reap these benefits — to the extent these benefits materialize as claimed,” Fuller said in an email.
So how much benefit will the region see? Experts predict a small bump to the region’s economy.
Fuller said he sees the possibility of a “small positive benefit” that will not be fully realized until after the end of the 2018 tax year. Rossi agreed that there would be a small benefit, although probably substantially less than predicted by proponents.
“Overall, the Washington region is not as well-positioned to benefit from the reductions in corporate taxes and may be more exposed to the downside of the changes in the household or individual tax provisions due to its above-average household income and above-average housing values along with the region’s higher state and local tax exposure,” Fuller said.
Copyright Washington Business Journal, reprinted with permission