Marylanders could find it more difficult to save money through popular tax deductions and credits under the tax cut bill unveiled Thursday by the Republicans in the U.S. House of Representatives.
The elimination of the deduction for state taxes and property taxes over $10,000, as well as the reduction of eligibility for the mortgage interest deduction from the current level of homes under $1 million to homes under $500,000 have caused concern in Maryland.
“(The elimination of the state and local tax deduction is) one of the biggest (parts of the bill), since Maryland is notorious for both high state taxes and property taxes,” said JP Krahel, an assistant professor of accounting at Loyola University’s Sellinger School of Business. “That may make a difference for some property owners in general.”
Marylanders use state and local tax deduction at a higher rate than any other state, according to the Tax Policy Center. Nearly 46 percent of the state’s filers used the deduction in 2015.
The Republican Tax Cuts and Jobs Act would double the standard deduction that filers can take as well as increase the child tax credit. That greater deduction would be expected to make up for a lot of the elimination of other deductions.
For people who file their taxes through free or inexpensive services like TurboTax, that expansion could be a big benefit, Krahel said. But with the loss of state income tax deductions, a cap on property tax deductions, the reduction of eligibility for the mortgage interest deduction and the elimination of the deduction of student loan interest, a filer looking to save money through deductions could lose out.
“It would make things simpler, but, I’d rather have things complicated and save money,” Krahel said. “Being mugged is a simple transaction, but that doesn’t mean I like it.”
Maryland’s lone Republican in Congress, Rep. Andy Harris, said the legislation would make life easier on the middle class.
“Under this bill, a typical middle-income family of four earning $59,000 annually will receive a $1,182 tax cut,” Harris said in a statement. “This legislation doubles the standard deduction, expands the Child Tax Credit, and maintains 401(k) and IRA retirement plans.”
The mortgage interest deduction would be reduced to new home purchases of less than $500,000, instead of the current $1 million. It could influence decisions on purchasing homes in the high cost-of-living Washington suburbs in Maryland.
Realtors are worried about changes to the mortgage interest deduction and the state and local income tax deduction.
“For over 100 years, there’s been an incentive in the tax code for home ownership,” said Bill Castelli, senior vice president for government affairs for Maryland Realtors. “That’s been a policy of this nation, to say communities are stronger when people have a vested interest.”
He said he was concerned that the changes could specifically hurt Maryland.
“Maryland right now … we were the highest itemizing state in the country,” he said. “We’re going to get hit harder on this tax proposal than a lot of other states.”
The Maryland Building Industry Association said it was “disappointed” by the proposal because of the effect it could have on home buying in Maryland.
“The $500,000 mortgage interest deduction cap will have significant impact in Maryland and will drastically reduce the number of homeowners who can take advantage of home ownership tax incentives,” said Lori Graf, CEO of the association. “It threatens to lower the value of the largest asset held by most American families and will force many home buyers out of the market.”
Another eliminated tax credit, could actually cost Maryland jobs, according to one advocate. The Emerging Markets Tax Credit would be eliminated under the current legislation. The tax credit is responsible for directing investment into poorer areas of the state.
“The tax reform proposal demonstrates an appalling disregard for low-income rural and urban communities by repealing the federal New Markets Tax Credit program, a vital piece of America’s tax code that has leveraged over $80 billion in public-private investments and created more than 750,000 jobs in some of our country’s poorest neighborhoods and towns,” said Bob Rapoza, a spokesperson for the New Markets Tax Credit Coalition, in a statement.
The coalition estimates that the credit has been responsible for creating more than 27,000 construction jobs and nearly 7,700 full-time jobs in Maryland between 2003 and 2014.
Harris said the tax cuts in the bill will enable businesses to create more jobs, including returning outsourced jobs from overseas.
“America’s small family-owned businesses and larger employers will receive tax cuts as well – allowing businesses to invest and grow, and encouraging them to return outsourced jobs to the United States,” he said. “The Tax Cuts and Jobs Act will stimulate economic growth and increase America’s competitiveness in the global economy.”
Thursday represented the first day the legislation was officially unveiled. It is expected to undergo changes as the legislative process continues and the Senate unveils its own tax cut bill.