The Trump administration released on Wednesday its initial sketch of what tax reform might look like.
Two specific areas to pay attention to as the debate develops would be the Mortgage Interest Deduction’s continued viability as a way to incentivize homeownership and a provision that would eliminate state and local tax deductions.
- According to the Wall Street Journal, the tax package as outlined by the administration on Wednesday, would essentially double the standard deduction to about $24,000.
That means itemizing deductions including the Mortgage Interest Deduction would be less enticing or useful for those filing. That’s an issue since having the MID at full impact is an incentive to get people to buy homes. And homeownership, in addition to being economic bedrock, also serves to stabilize communities and gives families a shot at wealth creation.
By one measure, the average itemized deduction is about $26,000, so it’s not hard to see why doubling the standard deduction to $24,000 could make itemizing obsolete in many cases.
- Also troubling is a move to eliminate local and state tax deductions.
Illinois reportedly has the highest property taxes in the state, and with an as-yet unsettled budget situation, it’s possible these taxes might increase over time. If the deduction for state and local taxes vaporizes, that means Illinois taxpayers will take a greater hit than states with lower taxes.
Illinois has a 3.75 individual state income tax rate, having decreased from 5 percent a few years ago. Neighboring Indiana has a 3.33 percent tax rate.
According to a CoreLogic study in 2016 the state had a 2.67 percent median property tax rate, versus a 1.31 percent median average for the U.S. as a whole.
Illinois REALTORS® President Doug Carpenter noted that for years REALTORS® have been urged to be vigilant about protecting the Mortgage Interest Deduction. Now is the time for the association’s 44,000-plus members to get involved in making sure policymakers understand how watering down the MID could have serious economic effects.
“As REALTORS®, we see daily the worth that this policy has had for millions of Illinois families who invest in their communities through homeownership,” Carpenter said. “Eroding the value of the MID is bad policy, and won’t serve the best interests of consumers. We should promote tax polices which encourage homeownership rather than make it less attractive.”
NAR President Bill Brown called the proposal is a “non-starter” for the real estate industry and homeowners. (His full statement is here.)
“Major reforms are needed to lower tax rates and simplify the tax code, but that shouldn’t come at the expense of current and prospective homeowners, ” he said.
It’s important to note that this is just the first step in the tax reform debate which is expected to last many months.
Illinois REALTORS® have a chance in less than a month as part of Capitol Hill visits during the REALTOR® Midyear Legislative Meetings and Trade Expo to tell lawmakers in Washington, D.C., to maintain the the MID’s impact.