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How GOP Tax Reform Will Lead To Higher Property Taxes | Stock News & Stock Market Analysis

Higher property taxes are likely to be the unintended consequence of the new Republican plan to kill the state and local tax deduction, but preserve an exception for property taxes.

House GOP leaders, working feverishly to nail down tax-cut legislation by Wednesday, offered the compromise to blue-state Republicans who have threatened to torpedo tax reform if it kills the deduction that will save state and local taxpayers $1.3 trillion over a decade.

The deal would reportedly preserve close to $900 billion of the tax savings from eliminating the deduction, money that is critically needed to shrink the net size of the tax cuts to the $1.5 trillion allowed for under the GOP House and Senate budget resolutions.

But state and local tax policy will surely adjust in the wake of such a change, meaning that the GOP plan wouldn’t save as much as expected. In theory, it would be possible for states and local governments to shift entirely to a property-tax base, though there are major hurdles to such a development.

Americans Against Double Taxation, which includes the National Association of Realtors and a host of state and local government organizations, criticized the property-tax compromise, saying it “would insert the heavy hand of Washington into state and local finance decisions, dictate winners and losers among states, and unfairly penalize taxpayers in states that rely significantly on income taxes.” The National Association of Home Builders also opposes the GOP tax plan because it significantly weakens tax incentives for homeownership.


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Michael Leachman, director of state fiscal research at the liberal Center on Budget and Policy Priorities, told IBD that state governments only get about 2% of revenue from property taxes, which are generally the domain of local governments. Further, he notes, “income taxes are the only major source of state revenue that are based on the ability to pay, with rates typically rising with income.”

Moving from income taxes to property taxes, then, could be a regressive shift in taxation. That could defeat the goal of reducing individuals’ federal tax burden under the GOP tax plan, Leachmann notes, because a larger standard deduction might still exceed modest-income taxpayers’ itemized deductions, even with higher property taxes.

The takeaway is that a shift away from state and local income taxes wouldn’t be straightforward and could spur innovation by taxing authorities to raise revenue. One likely byproduct would be a graduated property tax, which mirrors the progressivity of the income tax and doesn’t penalize people who are past their working years.

The loss of the state and local tax deduction reportedly won’t extend to businesses. Daniel Hemel, assistant professor at the University of Chicago Law School, has written that killing off the state and local tax deduction could produce a shift toward more reliance on business taxes.

Hemel also agrees that the latest compromise would create an incentive to shift toward property taxes, though he notes that “some states are constrained in their ability to shift from income to property taxes,” such as California under Proposition 13.

The difference now would be that a shift to property taxes would be consistent with an anti-tax rebellion aimed at lowering federal tax bills.

There’s another way that the shift to property taxes could proceed. As states face stiffer opposition to income taxes, they may be less able to keep up with state needs, leading to cuts in their support for local governments, Leachman says. That, in turn, could lead localities to raise property taxes as, perhaps, the least bad option.

Another, albeit low-ranking, reason to shift away from income taxes would be for high-tax areas to keep their sports teams competitive. Players and their agents already take into account state and local tax differentials when comparing contract offers, and the implications would only grow with the loss of the income-tax deduction.

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