The tax bill racing through Congress this month could transform the US economy, cutting taxes for wealthy investors and everyday workers alike, and — its backers hope — sparking economic growth nationwide for years to come.
But as its details emerge, there’s increasing concern it would do so at the expense of a key slice of the local economy: well-paid, white-collar, suburban families.
Proposed changes targeting popular federal write-offs for home mortgages, student loan debt, and state and municipal taxes could hit especially hard in many Boston-area suburbs, where six-figure household incomes often belie budgets already stretched thin to meet the high costs of housing, child care — and the property taxes that fund some of the nation’s best public schools.
For many families, even those with sizable incomes, those deductions can have a big impact on the bottom line, said Jim Cote, a financial adviser at Concord Wealth Management. If they go away, he said, people used to turning a tax refund into college savings or a vacation fund could instead find themselves writing a check to the US Treasury.
“It’ll be a rude awakening,” Cote said. “In our market, a lot of this stuff is going to hit hard.”
Most Massachusetts taxpayers would see their taxes go down in 2019, by an average of over $2,000. But a study by the left-leaning Institute on Taxation and Economic Policy predicts that roughly 200,000 Massachusetts households earning between $83,000 and $333,000 would face higher taxes, with the average increase in 2019 approaching $1,500.
The prospect has Elizabeth Payne studying her past tax returns, trying to figure what the changes might mean for her. An accountant at a human resources firm in Boston, Payne and her husband together earn “more than $100,000, less than $200,000.” They have two young children and a house in Natick. But between mortgage payments, student loan debt, and day care bills that will approach $50,000 this year, she said, they barely break even. There’s not much left to sock away for retirement or their children’s college funds. She worries that the tax bill could sap whatever cushion they have left.
“On paper, we make a lot of money. We’d be considered wealthy by most American standards,” Payne said. “But in Massachusetts, it’s really tough.”
For a large majority of state residents, however, tax legislation that lowers tax rates and nearly doubles the standard deduction will mean more money in their pockets. ITEP’s study predicts that 80 percent of Massachusetts taxpayers would save on their federal taxes in 2019.
That money, supporters of the Republican tax plan say, should then flow through the economy, boosting consumer spending and creating jobs.
“Tax reform is the key to increased prosperity that small businesses, large employers, and middle-class workers have all been waiting for for more than a generation,” said Matthew Shay, chief executive of the National Federation of Retailers. “This is about jobs, wages, and America’s future.”
Tweaking federal deductions also could simplify the tax code, another oft-touted goal of the plan that — as a concept — has widespread public support. But the streamlining will come at a cost for some, said Michael Goodman, a professor of public policy at University of Massachusetts Dartmouth, especially those who have decided high housing costs and property taxes are worth it if they mean access to top-notch schools and town services.
“The impact will vary,” Goodman said. “But for households who are at the middle- to upper-middle-income level here, I think there definitely will be people who are paying more.”
Economic experts say the impact on household incomes could be even bigger in suburban New York and New Jersey — where property taxes are higher than they are here — and in California, which levies a hefty state income tax on top earners. In Greater Boston, the changes could be felt most sharply in suburban towns such as Lexington and Needham, where six in 10 households claim income and property tax deductions averaging $30,000 or more.
There are 42 ZIP codes in Massachusetts — mostly affluent Boston suburbs — where the average property tax deduction exceeds the $10,000 cap for deductions included in the Senate bill, according to data from the Internal Revenue Service. There are 110 ZIP codes where the average taxpayer writes off at least $10,000 in state income taxes — enough to lower a federal tax bill by thousands of dollars. As of now, the state income tax deduction would go away in both House and Senate versions of the plan.
That could cause some residents to be less agreeable to voting for local tax hikes to fund schools and municipal services. Cote — who along with being a financial adviser sits on the Newton City Council — said it could force some difficult decisions in communities that are used to high levels of service.
“Cities like Newton, Brookline, Wellesley, they’re not going to run out of money. It’s more about priorities,” he said.
That’s what concerns Debbie Millin about the tax proposal Congress is expected to vote on before Christmas. Millin and her husband moved to Chelmsford because of the school system’s quality reputation, she said, and even though their two children are now in college, they appreciate the investment residents continue to make in public education. Millin doesn’t want the schools to suffer, nor does she want funding for libraries, streets, and parks to be affected.
“Sure, everyone would like more money in their pocket,” Millin said. “But I don’t mind paying more in taxes if it contributes to schools and roads and senior centers.”
Then there’s the potential effect of a limit on mortgage interest deductions that also is part of the tax bill. In the House version, interest would be deductible on only the first $500,000 of a new mortgage, while the Senate version would maintain the existing $1 million cap.
The National Association of Realtors predicts that the lower limit could cause home values to fall 10 percent or more in parts of Greater Boston — devaluing many families’ biggest asset. Some housing economists have a different take — they predict fewer people would sell their homes, which would prop up prices, and they note that the tax cuts would give people more money to spend on housing.
And would employers be able to fill skilled jobs if the prospect of a comfortable middle-class life in Massachusetts becomes in doubt?
It likely will take years to answer such questions, said David Begelfer, chief executive officer of NAIOP Massachusetts, a commercial real estate trade group. But for an economy built on, and powered by, higher-income workers willing to make the trade-offs that come with living in a high-cost state, he has a hard time seeing how this tax plan will do much to help Massachusetts.
“We don’t have a lot to gain from this in Boston,” Begelfer said. “We do have the potential to lose. We’re going to have to wait and see.”