Title: The Property Tax Deduction-Impact on Governments and Taxpayers
Abstract: INTRODUCTION With the federal debt at an all-time high and policy makers wanting to broaden the tax base in exchange for lower marginal tax rates, legislators continuously look at tax reform, specifically, deductions for mortgage interest, state and local taxes, and charitable contributions, to serve their purposes. For decades there has been much debate about the possibility of eliminating certain state and local taxes, to include state and local income taxes, real estate and personal property taxes, and general sales taxes. While at a quick glance we see that these eliminations could reap great monetary benefits for the federal government, a closer look will reveal that there is more at stake than just the revenue gained. This paper examines the ways different constituents are affected by the deductibility of real estate property taxes and whether eliminating this tax provision is a viable option. BACKGROUND The Revenue Act of 1913 was enacted during Wilson's presidency, and created the first federal income tax, substantially replacing the revenue that was being acquired from tariffs with revenue acquired by taxing an individual's income. The Revenue Act of 1913 allowed itemized deductions for taxes paid, to include almost any tax paid during the year. In 1944, the standard deduction was introduced in the Individual Tax Act, as income taxes were becoming more standard for everyone, instead of only the wealthy. It offered a tax break to those middle and lower class taxpayers who did not have substantial deductions to itemize. Itemized deductions grew between 1947 and 1979 and included deductions for items such as state and local taxes, certain interest paid, charitable contributions, and special health expenses. The revenue gained from these itemized deductions was diminished somewhat by the also growing standard deduction, because taxpayers were benefiting more from the amount received in the standard deduction than what they received when they itemized. In 1986, the Tax Reform Act of 1986 (TRA86) was introduced, which eliminated or amended some of the tax deductions, including the temporary elimination of the state and local sales tax deduction and restrictions on the home mortgage interest deduction (CBO, 2008). BENEFICIARIES OF THE PROPERTY TAX DEDUCTION Currently the Internal Revenue Service allows an individual to deduct taxes paid for real estate and personal property. The amount a taxpayer saves in federal taxes is found by multiplying the amount being deducted by their marginal tax rate. Maguire & Stupak (2015) noted that there is a strong correlation between individuals with higher income and property ownership with greater values, as well as higher income correlating with higher tax brackets. This means the amount of taxes a taxpayer pays on their property will be higher because of progressive state taxes, allowing them a larger deduction, which is then multiplied by a higher marginal tax rate, resulting in more of a tax savings than those with lower incomes. However, for incomes over $200,000, the tax savings decline because those taxpayers are subject to the Alternative Minimum Tax (AMT), which disallows the property tax deduction. In order to take advantage of these deductions, the taxpayer must itemize their deductions, rather than take the standard deduction. They would only itemize if they can claim enough deductions for the itemization to be higher than the standard deduction, and this also usually applies to those in the higher income ranges. As shown in Table 1, when the adjusted gross income range is between $0 and $25,000, the percent of taxpayers itemizing is less than 10%. Between $25,000 and $50,000, the percent of taxpayers increases to between 13% and 30%. Between $50,000 and $100,000, about 50% of taxpayers itemize. Finally, just under 80% of all taxpayers who make over $100,000 itemize their deductions, with that percentage increasing substantially as the AGI increases (Statistics, 2013). …
Publication Year: 2016
Publication Date: 2016-01-01
Language: en
Type: article
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