The U.S. House passed a tax reform bill last week. Meantime, the Senate is still hammering out details of theirs. Both pieces of legislation would change the state and local tax (SALT) deduction, which could put the squeeze on public schools.
The House plan does away with the state income tax deduction and caps the local deduction at $10,000. The Senate proposal gets rid of both deductions.
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“Imagine that now you pay $10,000 a year in state taxes, and let’s say that you’re in the 28 percent federal income tax bracket,” says Nora Gordon, an associate professor of public policy at the McCourt School at Georgetown University. “When it comes time to fill out your tax forms, you’re subtracting that $10,000 you paid in your state income taxes from your federally taxable income. That means it’s saving you $2,800 in federal income taxes.”
The state still gets the full $10,000. The federal government pays the $2,800.
“A good way to think about it is the federal government has been subsidizing public schools through these tax deductions — the state and local ones —because it’s easier to raise taxes with those in place,” Gordon says.
In other words, receiving a deduction can soften the blow of a higher tax bill.
“The taxpayer is willing to tolerate a higher tax rate when they have that deduction available, and if those deductions go away, it’s going to be harder to have rate increases, or even sustain current rates,” she says.
It may take a while for any changes to take effect.
Jarod Apperson is a Ph.D. candidate at Georgia State University studying the economics of education. He says eliminating the deductions would impact schools, but it’s hard to know exactly how.
“I think it really is a question of how sensitive people are with the taxes, and whether or not politicians want to change the tax structure to readjust to what people prefer,” Apperson says.
Politics aside, Apperson says people could make personal choices that could affect tax collections.
“They may be more likely to opt for smaller or less expensive houses — and the big, expensive houses are the ones that will be affected by this change, but also the ones that provide more of the tax base to the school districts — and then, potentially, it could incentivize homeowners to move to districts that have lower property values or lower millage rates,” he says.
If Congress does away with the SALT deductions entirely, that could mean less money in the long run for public schools.