There’s a lot we still don’t know about Mitt Romney’s idea to cap itemized deductions at $17,000 as a possible way to help pay for his tax cuts. We don’t know what, precisely, it includes. We don’t know if it’s just itemized deductions or, as Romney hinted, it also includes exclusions like health care. We don’t even know if Romney actually supports it. His campaign said it’s just an “illustrative example.”
But here’s what we do know: Cutting deductions at that level would predominantly target the wealthy, as well as middle-class homeowners in states and urban areas with high property values, says Roberton Williams, a senior fellow at the Tax Policy Center.
“This is going to disproportionately hit high-income people,” Williams says. “It is very progressive.” Overall, about 30 percent of all taxpayers itemized their deductions, and they’re more likely to be taxpayers in higher income brackets for two reasons: 1) Wealthier taxpayers are more likely to have deductible expenses from mortgages and charitable contributions; 2) Each tax dollar deducted has greater value when you have a higher tax rate.
As such, 80 percent of tax savings from itemization goes to the top 20 percent of Americans households, and 25 percent of the savings goes to the 1 percent, Williams explains. Much of those savings come from the mortgage interest deduction, as well as deducting state and local taxes paid, with an average total deduction of $26,344 in 2009, according to a TPC report.
But Williams points out that a $17,000 itemized deduction cap is also likely to punish middle-class taxpayers who live in areas where home prices and/or state and local taxes tend to be high—namely, urban areas of California, the New York metro area, other parts of the Northeast, and the Washington, D.C. metro area. For example, the owner of a $450,000 house with a 4 percent interest rate on a 30-year mortgage would already be qualified for a $18,000 mortgage interest deduction, Williams points out.
That said, there are a few important caveats: For the purpose of his analysis, Williams didn’t count the employer exclusion for health care as an itemized deduction. If Romney does, the plan would raise more money, but it would also hit the middle class much harder. According to the Kaiser Family Foundation, the average employer-based health-care plan costs about $15,745. If that’s counted towards the cap, it would leave only around $1,255 in other deductions for families with standard employer-provided insurance. That would mean many, many middle-income families blow through the cap and see a tax increase.
What’s more, Williams agrees with Brookings’ Bill Gale that a $17,000 cap still wouldn’t be enough to pay for the steep, across-the-board tax cuts that Romney is proposing. So while Romney has offered more specifics, his tax math still doesn’t add up.