Question

Under the new tax law passed in December 2017, individuals can deduct no more than a combined $10,000 of state and local property taxes and either sales or state income taxes from their federal taxes. Previously, individuals could deduct all of these items fully (up to a certain limit for very high-earners). News reports have focused on how these new provisions may disproportionately hurt taxpayers (depending on their individual situations) in high-tax states such as California. In a couple of short sentences, explain why taxpayers in high-tax states are hurt by this change as compared to taxpayers in low-tax states.

Answer 1

Under the new plan, taxpayers who itemize will be able to deduct their state individual income, sales and property taxes up to a limit of $10,000 in total starting in 2018.

Currently the deduction is unlimited. But filers have to choose to deduct either individual income taxes or sales taxes. For most people, deducting income taxes is more beneficial (unless of course you live in a no income tax state). In addition, property taxes were also entirely deductible.

While elements of the tax plan could help offset the lower threshold, like the nearly doubled standard deduction, expanded child care credits and lower individual tax rates, they won't necessarily be enough to make up for the loss of tens of thousands of dollars. High-income and high-tax states benefit the most from the deduction. Together, California and New York receive around one-third of the total value of the deduction. California leads the pack with a top marginal income tax of 13.3%.