We’re all hearing a lot more about tax reform these days, and though no one who’s done their own taxes recently thinks the tax system is uncomplicated, tax reform makes navigating a 1040 seem simple. All proposals that deal with tax reform simplification have to balance out changes to tax rates with removal of deductions. Instead of trying to deal with the entirety of one tax reform bill or another (there are more experienced and knowledgeable folks who can do that) I’m going to try and talk about some of those that affect Pulaski most directly.
One tax policy that is extremely popular is the mortgage interest tax deduction, touted as an easy way to encourage home ownership. In Pulaski County, the median home price is about $142,000. This means that median mortgage interest for a year is less than $5,200, and decreases every year (assuming a mortgage amount of $130,000, 4% interest and 30 year term). Under the current standard deduction of $12,600 for married couples it would not make sense to itemize that deduction and take the mortgage interest deduction unless you had lots of other itemized deductions (e.g. for large medical expenses). If, on the other hand, you took out a $500,000 mortgage to purchase a home (even a second home) your mortgage interest would be $22,000 and would not fall below the standard deduction until over half of the 30 year period was completed. So the tax deduction does help people buy homes, just more often expensive or second homes rather than the homes that most first time and lower price homebuyers (like those in Pulaski) could purchase.
“There are nearly eight million low-income homeowners that struggle to pay for housing from month to month. On average, low-income households get about eight cents per month from these two homeownership tax programs. Eight cents. There are also about four million middle-income households paying more than 30 percent of their income on housing. The average monthly benefit from these tax programs for middle-income earners? Twelve bucks.” (https://ggwash.org/view/42632/the-biggest-beneficiaries-of-housing-subsidies-the-wealthy)
Currently, both the Trump and Ryan tax plans would raise the standard deduction for married couples to $30,000, but leave the mortgage interest tax deduction. The mortgage interest deduction costs the US Treasury about $70 billion dollars in terms of lost tax revenue. Raising the standard deduction would lower this amount, but would concentrate the use of the deduction to the highest earners. The deduction is an enormous subsidy to the wealthy, as almost 73% (or more than $51 billion) goes to the top 20 percent. Only one percent goes to those who make less than $50,000 per year. (As previously noted, the median household income in Pulaski County is about $45,000.) Some economists even dispute that the deduction even encourages homeownership, as countries such as Canada have similar ownership rates without the deduction. While tax policies that encourage home ownership and make housing more affordable are worthy targets of government, those policies should put the most money where its most needed.