WASHINGTON — Say you live in Massachusetts (or New York, or California, or Illinois). You and your spouse earn salaries commensurate with your advanced degrees, together bringing home $250,000 to $500,000. You make monthly mortgage payments on a nice house in a suburb where property taxes are steep.
Whether you call yourself rich, fairly well-off, or merely upper-middle-class, you are in the crosshairs of the Washington tax debate.
House Republicans' proposals to cap or even eliminate itemized deductions would exact a bigger toll on upper- to high-income earners in the professional classes.
These earners are not the Warren Buffetts and the Mitt Romneys. They are the smartly suited, rank-and-file achievers who populate financial districts and research parks. They drive base-model BMWs and have timeshares in Florida, not their own private islands.
They are comfortable but still worry about college tuitions, retirement savings, vacation money — and they are the slice of America that relies most heavily on tax deductions for mortgage interest, state and local taxes, and charitable contributions to reduce their annual taxes, specialists say.
The rise in annual tax payments to the federal government for people in these income ranges could reach into the thousands and perhaps tens of thousands of dollars, depending on the details and the outcome of the intense political wrangling on Capitol Hill.
"The people who would be most hit by these kinds of changes are the upper-middle class, people making a few hundred thousand dollars a year,'' said Lawrence A. Zelenak, a law professor and tax specialist at Duke University.
A high proportion of those taxpayers live in urban areas and blue states on America's coasts, intellectual and financial hubs like Boston, New York, and San Francisco. They pay the highest state and local taxes, and their mortgages are big.
"You're in one of the metro areas with a heavy concentration of people exactly like that,'' Zelenak said in an interview.
The debate over tax policy inevitably breaks down to who will get hurt the most if the code is changed. The biggest philosophical difference between President Obama and House Speaker John Boehner remains the disagreement over how to extract more taxes from Americans while delivering the least pain to particular constituencies.
Obama wants to raise the marginal rates on the highest 2 percent of taxpayers – the people who he says can afford it, with family incomes above $250,000. Boehner is dug in against any increase in rates, reflecting GOP orthodoxy, but said Monday that he would be willing to limit tax deductions to raise revenues. Obama has indicated a willingness to consider some such limits, but only if tax rates on top earners also rise.
Limiting deductions naturally means a bigger hit to the pocketbooks of people who rely most heavily upon them. Precise impacts and details for where the burden would fall are not available, because the negotiators have only released broad targets for revenue increases of all kinds — $800 billion for Boehner, $1.6 trillion for Obama.
Under current deduction rules, an upper-middle class homeowner in the top marginal rate bracket paying a hypothetical $12,000 in mortgage interest each year can reduce their federal income tax bill by about $4,000. Median property tax bills in wealthy Massachusetts suburbs often exceed $10,000 a year, which would permit additional deductions worth a few thousand dollars more in tax bill reductions.
Capping deductions at $17,000 – an idea former Republican governor Romney floated during his campaign for president, to use one example – would subtract $5,000 from the possible deductions for that homeowner, and raise the annual tax bill by up to $1,750.
That is just part of the tax increase such a person would pay. The scenario does not take into account the effect of potential limits on deductions for state income taxes, charitable contributions, or medical expenses.
Geographically, the increase in the tax burden from imposing deduction limits would be greater for people living on the coasts, rather than in Texas, for example. Massachusetts ranks 16th in deductions, as measured as a percentage of income. Texas ranks 45th.
"States with high-income people and high taxes would like [Obama's] rate increase better – places like New York or California or Massachusetts,'' said Bob McIntyre, director of Citizens for Tax Justice, an advocacy organization in Washington. "States like Texas, where they don't have much in the way of taxes, they would prefer deduction limits. The average itemized deductions for the rich in Texas are way lower than they are in large, wealthy states.''
The superwealthy – people like Buffett and Romney – would certainly feel greater pain from deduction limits than people making $300,000 or so, but it might not be proportional to their giant incomes.
That is because multimillionaires are less dependent overall on deductions to shield their income; instead, they rely on things like low capital gains rates on investments and low dividend rates.
Limiting deductions for the one-third of Americans who file itemized returns would increase taxes most heavily for the wealthy, but in many cases it will reach further down the food chain than Obama's proposed increase in the top tax rates — which would be strictly limited to upper brackets.
"By limiting itemized deductions, you will hit the rich harder than the middle class. They are more likely to itemize. And when they itemize, they itemize a lot more stuff. And their tax savings is bigger. At a 35 percent marginal rate, every dollar deduction saves you 35 cents,'' said Roberton Williams, a senior fellow at the Tax Policy Center, a nonpartisan research group in Washington.
"But the problem with doing it with itemized deductions is it does hit that middle-income group more than if you just do it with rates,'' he said. "So it's not a matter of not being progressive. It's a question of not being progressive enough.''
Opinion polls indicate that Obama's approach to taxes is more popular than Boehner's. A Washington Post/ABC News poll released last week said 60 percent support raising taxes on the wealthy. When it comes to limiting deductions, 49 percent oppose the concept, while 44 support it.
Such poll numbers have given Democrats confidence that they have Republicans on the defensive as the White House and congressional leaders negotiate ways to avoid the fiscal cliff, that combination of across-the-board tax increases and automatic spending cuts scheduled to take effect on Jan. 1. Economists warn that the country would slip into recession sometime next year if the tax hikes and spending cuts draw too much money out of the economy.
If no deal is in sight at the end of the month, some Democrats are prepared to allow the automatic tax hikes to occur, then put Republicans even further on the defensive by immediately pushing a bill in early January to restore Bush-era tax cuts only for the 98 percent who make less than $250,000.
Williams, of the Tax Policy Center, called those lawmakers "cliff divers."
Their strategy carries risks, he said, because their ability to push through tax cuts and stave off automatic budget reductions after the new year is not guaranteed.
"What they don't know is what's at the bottom of the cliff — water, a soft pad, or a rock,'' he said, "and we won't know until we jump over.''