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Comment by kellysutton | Hacker News Reader

My tech-friendly CPA has a nice newsletter that outlines some of the effects of the proposed tax bill:

http://mailchi.mp/2b465b061dd6/december-2017-clients?e=c3de0...

In short, engineers in CA/NY will see their taxes increase substantially because you can no longer deduct state income taxes.

The $500k mortgage interest deduction will also affect folks in states with expensive property, but current versions of the bill only apply this new limit to mortgages created after Nov 2, 2017.

If you are an engineer making a salary in the band you mentioned, this is most likely going to be a significant raise in your tax bill.

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This writeup makes the excellent point that the weight of the new tax structure falls heavily not only on the high-population coastal states but also on the younger demographic within those states.

It falls heavily on the demographic that supported Trump the least.

Most young people don't make enough to pay a lot in state income taxes, don't own a house so they don't pay mortgage interest, don't have a professional job that has all sorts of tax-free benefits, don't have kids and aren't married so they can't use many personal exemptions, etc. The tax bill cuts corporate taxes while raising taxes on middle/upper middle class people. That's consistent with taxes in Germany, Canada, the U.K., etc.

The mortgage interest thing does impact young people though. While they can't buy houses now, once they do have the financial ability to do so it'll cost them more than it cost their parents to buy a house.

No, it will cost them less, because the value of the mortgage interest deduction is baked into the price of the house. It'll also be more fair. The perverse thing about the mortgage interest deduction is that it benefits you more the more money you make.

I'm a little confused about this. I can understand this in terms of college (i.e., no one pays the sticker price so the prices are elevated, etc.).

But for housing, especially in very competitive markets, I feel that things will prove different. Already, successful house purchases come in above the offering price (from what I've seen) in the Bay Area. Do you think the loss of mortgage interest deduction will lead sellers to decrease their asking prices?

Reduction in demand should lower prices, yes. Either that, or fewer sales.

The reverse - making mortgages cheaper - would also just raise prices.

So if prices do go down, that means property taxes also goes down. So now legacy homeowners get a double tax cut (i.e. they keep the mortgage deduction, and have a lower property tax bill)?

Old properly owners in CA already have a lower property tax bill since they pay on purchase price, not current market price like WA.

Say my marginal dollar is taxed at 40%, and I buy a house valued at $500,000. That value includes not just the house, but the value of the tax deductions. Over the first 10 years at 4% interest, I pay about $17,500 in mortgage interest, which make the value of the tax deductions about $7,000 per year, or $580 per month. If you get rid of the stream of tax deductions, you're lowering how much the house is worth to any buyer who has labor income and will be financing the house (i.e. almost everyone).

Indeed, for almost all houses (even in the Bay Area), people count on the tax deductions to determine how much house they can buy. If you can afford to pay a net $1,800 per month, for example, you can buy a $500,000 house (with a $2,400 monthly payment) given the roughly $600 per month in tax breaks. If you get rid of the tax deduction, you can no longer afford a $500,000 house, and neither can all the other people who previously had a $1,800/month budget. In the long run, that drives the value of the house down by the amount of the lost tax deduction.

It just raises costs. It’s like an interest rate hike, especially in markets where interest only mortgages are common.

The bigger issue is SALT, which is designed to implode local government.

Or perhaps it will help moderate housing prices and make it easier to purchase a reasonably priced house.

>falls heavily not only on the high-population coastal states but also on the younger demographic within those states

Coincidentally the very people who voted for Hillary.

I get the frustration of the author on grandfathering in mortgages for interest deduction, and you could certainly argue it’s for the benefit of boomers at the expense of millennials, but isn’t it the only sane option? Otherwise the tax bill could effectively be putting people with existing mortgages (not an easy thing to get out of) in a serious bind. It kind of seems a bit unfair.

Though I will admit after writing that out, that it’s probably not really that different than other taxes - if you plan your financial life around a certain tax situation you have to understand it could always change.

The overall lower tax rates are the biggest hand out to the boomers. They’re the ones with retirement accounts that only now begin to draw down at the lower overall rates.

Boomers may feel some pain though when Medicare and social security are cut next. All signs point to the GOP suddenly crying about the deficit now.

Were very much due for a bubble burst anyway. I think tax cuts for the rich will only drive into the frenzy.

Right, so then the austerity kicks in. On some level the GOP knows this.

It’s fine to say that people shouldn’t plan around tax situations, but that tax break has been thought to be untouchable for a long time now. I’m a millennial who bought last year so for me, this doesn’t sound very fair. Boomers got to take advantage of favorable tax write offs on their homes for decades; I’ll be able to get in on that for 2 years. 2.

I thought if you have a mortgage then you are grandfathered in, no?

you are, but the removal of the state & local income tax deduction means only a small % of people will ever claim mortgage deductions compared to today. You’d need over 24K in mortgage interest + property taxes.

The mortgage interest deduction is bad. Economists are almost universal in their agreement on this topic. Sure it sucks that some people got to take advantage of a bad thing in the past, but that isn't a good argument for keeping it around just for the sake of generational fairness.

That’s just one facet, I don’t think that’s the only reason to keep it around. I think it’s irresponsible economics to encourage an economic behavior and then to uproot it abruptly. I think the knock on effects on the housing market and rental markets haven’t been appropriately priced in. I think there’s a lot of ways for this to go sideways and the payoff isn’t that great.

Couple that to the estate tax changes which are not an economic driver and help to curb wealth inequalities and I think it’s a raw deal.

If you have significantly more than $500k in mortgage interest you are either rich or choosing to live in a top-10 realestate market.

You don’t have to live in a top 10 real estate market because losing the SALT deduction neuters the mortgage interest deduction.

>this is most likely going to be a significant raise in your tax bill.

SALT changes will cause a 1-1.5% percent decrease in after tax income for those making 150k-250k per year, the magnitude increase on taxes is not especially significant.

https://www.vox.com/policy-and-politics/2017/10/30/16557554/...

One important consolation, for those of us who are savers. Corporate profits are likely to increase significantly (at least on a first-order basis). So if you own a lot of stock, I somewhat expect to see the return on that rise. This doesn't help folks who are just starting out, or else don't save much, but it is an offsetting change that may help some people reading this.

One other effect to consider is the housing prices after the bill. Expensive areas might see an up to 10% drop in property values, which would be bad for those who recently bought but should be easily weathered by others who have seen an 80%+ appreciation in the last 6 years.

why would they drop?

Because buying property becomes less lucrative and requires more money with no mortgage interest tax deduction. I'm not sure anyone has modeled an accurate demand curve, but in theory this will impact housing prices.

But if you sell, you lose your grandfathered in deduction.. a supply cut that might cancel it demand cut

And in California we still have Prop 13, which effectively locks long-term owners into their existing houses.

It's hard to imagine supply getting any lower than it already is, but yes that is potential offset.

That really really sucks because state taxes in coastal cities are already extremely high relative to the rest of the nation and $100-200k earners in these cities aren’t rich

The senate version keeps the mortgage deduction at 1MM

Remains to be seen which one will win.

Thanks for sharing that, it's a great write-up.

Understandably most people in high-tax states would be upset by this, but I see it a as a positive overall. This will put more pressure on those states to reduce their tax rates, lest they lose the workers.

Ultimately, I don't think that states like California use tax money responsibly, so the lower the tax rate the better. Democrats will have two options, to lower taxes or lose seats.

>Democrats will have two options, to lower taxes or lose seats.

The Republicans in Southern California, New Jersey, and Upstate have two options, to not vote for the reconciled bill in the house or lose their seats and the house majority.

There are Republicans all over California, in fact the only blue districts are the major population centers.

I anticipate they will vote with the party, as in either case once the Tax Bill passes their blue constituents won't be happy.

Inaccurate. Orange county voted for Hillary by nearly 9 points while people like Darrel Issa barely hung on. Same for people that hung on in the Bluer parts of Colorado and NoVa like Mike Coffman and Barbara Comstock.

The reckoning is coming in 2018.

Why? California, New York etc are net donor states that contribute tens of billions more to the federal government than they get back, while other states like Alabama get $2 for every dollar contributed. SALT was part of tax code since the introduction of federal income tax in 1913.

For all the right wing complaining about welfare and redistribution of wealth, and states rights, they're more than happy to accept it when they take blue state dollars.

I'm pretty upset at this because despite the relatively high rates of state and local taxes in New York, i have no qualms paying them. Services such as the Department of Environmental Conservation, social services, state parks, education, arts and culturals are effective and well funded compared to most states. I don't think we should be punished for this.

I'd like a citation on your first statement. All things considered, I don't believe either state is contributing more than they get back.

If you like to contribute to those services, you are more than welcome to, but they should not be mandatory contributions. My own view is the smaller the government, the better. Federal and State governments have their place, but it should be up to citizens to decide what matters to them.

http://www.rockinst.org/pdf/government_finance/2017-09-28_Ba...

It's been analyzed by many groups, multiple times. New York contributes more than it recieves.

The Rockefeller Institute of Government report linked above estimated a deficit of 47 billion dollars in FY 2017 alone.

It should come as no surprise considering these states are home to the some of the most successful economic regions in the country.

Your second point doesn't jive with support of this tax plan. It's forcing a tax hike on productive populated blue states to pay more to the federal government which are less represented in how it's spent compared to rural states. I'd love more state and local control, the last thing I want my taxes going to is more GOP funded military pork.

And it's a race to the bottom. If you aren't rich, eat shit.

For those that complain that high tax rates are holding CA and NY back - how do you explain all of the growth and innovation from these states for decades?

SALT deduction is a regressive deduction that benefits the wealthy much more.

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