Analysis: After Tax Law, $7.5B In Federal Deductions Taken By Mass. Residents Won't Be Available

Public policy debates often pivot on the value and impact of tax cuts and reductions, and the uncapped deduction for state and local taxes wiped off the books by the federal government in late December is a doozy in Massachusetts.

According to a new report from the Massachusetts Taxpayers Foundation, Bay State residents in 2015 were able to deduct from their gross income $19 billion in state and local taxes under the tax structure in place before Congress and President Trump last month capped those deductions at $10,000 per year.

That means that about $7.5 billion in federal deductions taken by Massachusetts residents will no longer be available, according to a foundation analysis shared at the News Service's request. The analysis shows about a third of taxpayers will be affected, with the largest impacts felt among the wealthiest.

"For a lot of people in Massachusetts, they are going to feel the effect of the cap," Eileen McAnneny, foundation president, told the News Service. "People with higher incomes tend to deduct and itemize at a greater percentage than folks with more modest incomes. They will be seeing certainly an increase in their income tax and property tax burden because they will be able to deduct less at the federal level."

According to the foundation's research, 34 percent of Massachusetts tax filers in 2015 claimed state and location tax deductions, with an average deductible claim of $17,000. That means most tax filers won't be affected by the so-called SALT deduction change, but about a third of filers will feel impacts.

At more than 417,000, the biggest group of filers claiming SALT deductions was those with annual incomes of $100,000 to $200,000, and the average deductible claim within this group was $13,000, or $3,000 above the new $10,000 cap. The largest average SALT deductible claim, $250,000, was associated with households with annual income above $1 million, a group of nearly 15,500 tax filers in which 96 percent claimed SALT deductions. People in this relatively small group of wealthy taxpayers now face an exposure of $240,000 per tax filer or a combined exposure of $3.7 billion, according to the analysis.

To put the magnitude of the deduction change in perspective, consider two ballot questions that could appear before Massachusetts voters in November. The total value of the proposed 4 percentage point income surtax on households with more than $1 million in annual income is about $2 billion, and reducing the sales tax from 6.25 percent to 5 percent, as is proposed in another 2018 ballot question, would provide about $1.3 billion in tax relief.

The capped deduction will hit hardest in states like Massachusetts with higher incomes and property values, compared to other states. Taxpayers late last year flocked to municipal offices in Massachusetts attempting to prepay 2018 property taxes -- further evidence of the uncapped deduction's value.

The foundation, a business-backed group, says the capped federal deduction "will make Massachusetts state tax burden much less competitive compared to many other states." In its report, MTF wrote: "Limitations on that deduction will mean that the income and property tax burden in Massachusetts got much more expensive relative to lower-tax jurisdictions and could make Massachusetts a less attractive place to work and live."

While there are studies that show tax policy shifts don't make a big difference in the lives of the wealthy, the capped SALT deduction will have an impact, according to Amy Pitter, president of the Massachusetts Society of Certified Public Accountants.

"There are definitely going to be people who this is going to matter to," Pitter, a former Massachusetts revenue commissioner, told the News Service. "And we've seen it for years — retirees leaving the state, and one of the reasons they're leaving the state is because of differences in tax policy and also differences in cost of living, and this tax policy is going to impact the cost of living. It wouldn't make sense to say that this will have no disruptive impact."

Charitable giving in Massachusetts could suffer if taxpayers opt against itemizing deductions, Pitter said, and potential homebuyers may opt against taking the leap due to tax law implications.

"Those are the kinds of decisions people are going to make that are really going to impact the economy," she said. "You're going to see pressure on people to leave the state because suddenly the high cost of housing in Massachusetts just became a lot more painful and the high cost of taxation in Massachusetts just became a lot more painful."

Gov. Charlie Baker this week said prognostications about impacts of the federal tax law amount to "wild guesses" at this point and Pitter agreed that the law includes so many moving parts -- changes in the standard deduction, the estate tax law, the corporate tax rate -- that it's difficult to make predictions.

"It's always very hard to predict what taxpayers are going to do," she said.

The cap will also increase the tax burden on some of the same wealthy taxpayers that face higher state income taxes under a constitutional amendment marked for a vote in November and designed to raise new funds to invest in education and transportation.

"The interplay of the income tax surcharge and the loss of the SALT deduction -- that can't help but be disruptive," said Pitter.

Asked if the measures will truly spur wealthy individuals to examine whether to remain in Massachusetts, Pitter said, "Sure. I think absolutely."

While tax overhaul advocates tout the stimulative effects of higher standard deductions and a lower corporate tax rate, the foundation also pointed to another aspect of the new law that would tax many college endowments, noting that measure "will increase costs for one of the largest sectors of the state economy."

The foundation projected short-term revenue benefits to the state, such as an increase in capital gains taxes, and increased economic activity associated with the new federal law, while concluding the long-term impacts on the state economy are "largely negative."

The new law also increases the likelihood of federal spending reductions to pay for the tax breaks, and the foundation warned Beacon Hill will face pressure to backfill accounts if children's health insurance and home heating assistance funds, for instance, are cut.

Housing advocates on Wednesday said the state urgently needs to pass a $1.7 billion housing bond, in part because the lower corporate tax rate in the reform law will decrease demand for investors to seek tax credits associated with the production of low-income housing.

"With the federal tax bill going in effect, there will be fewer resources for the building and preservation of affordable homes in Massachusetts. Without state action, our regional housing crisis will worsen, and thousands of people will be left homeless or struggling to hold onto homes they cannot afford," Rachel Heller, CEO of the Citizens’ Housing and Planning Association, said in a statement.

States are grasping for information about impacts of the federal tax law, mindful that the law is multifaceted and affected states differently.

The Legislature's Revenue Committee plans a Jan. 23 public meeting to discuss the federal law's impacts, but testimony is by invitation only.

Meanwhile, responding to rising interest as to whether major tax hikes could be part of the short-term response to budget uncertainty, House Speaker Robert DeLeo made a stark and significant declaration Wednesday afternoon.

"The House will not be proposing any new broad-based taxes in its budget," DeLeo said in a statement. "As we go through the budget process, we are mindful of how changes to the federal tax code will impact both Massachusetts residents and the local economy. The House is exploring options to mitigate negative repercussions for Massachusetts resulting from the new tax code. In particular, we are reviewing the effects of the SALT cap."