Gov. Romney has proposed a limit on itemized deductions of $17,000. Of course, there were few details so we have a lot of questions; what will happen to the standard deduction, is the $17,000 for all filing statuses, will some deductions be treated separately…? There is also no doubt that the cut will hurt higher income taxpayers hardest. Imagine what Gov. Romney’s 2011 tax would have been if he could have only taken $17,000 instead of the millions in itemized deductions he was able to deduct.
Limiting tax deductions and credits based on income is nothing new. Income on the return has an impact on Earned Income Credit, IRA deductibility, child care credit and many other tax saving programs. In fact, until recently, itemized deductions could be limited by income. We accept it as part of the progressive nature of the tax code.
However, we’ve never limited credits and deductions based on where a taxpayer lives. That’s what an arbitrary cap like the $17,000 could do.
The most universal itemized deductions are not voluntary. They are the cost of living in an area. I’m focusing in on state and local income/sales taxes, property taxes and mortgage interest because they are tied to location and are in many ways out of the taxpayer’s control. A few years ago, several colleagues were discussing their property tax on a forum and I was surprised on the difference in their taxes for the same property value. And how many taxpayers have moved and found that to get the same house they had in their old location they would have to pay much more and take a larger mortgage. The IRS takes into consideration cost of living in different areas in per diem rates and the sales tax deduction charts. Location affects the cost of living.
Imagine, two taxpayers making $100,000 a year with itemized deductions including only state/local income or sales tax, mortgage interest and property taxes. One could find she can’t use all the itemized deductions under Romney’s plan because she paid over $17,000 in taxes and mortgage interest. While a friend, who lives in another location and earns the same amount, can use all his deductions because his cost of living is lower. To me, that’s plain wrong. They both should be able to deduct what they actually paid or both equally phased out based on their income level.
A cap or phase-out based on income has long been part of our tax code. But an arbitrary cap which will punish equal income taxpayers isn’t good tax reform.