7 Questions Answered For Connecticut Taxpayers About The Republican Tax Plan

Homeowners in Connecticut with crumbling foundations and Yale University could be among the losers if the tax legislation that passed the U.S. Senate over the weekend is signed into law by President Donald Trump.

The tax debate has been sharply partisan, with Republicans saying it will reduce taxes on the middle class and Democrats saying the opposite.

Multiple nonpartisan analyses agree that corporations and the wealthy will see the greatest benefits from the tax bill. Filers that take the standard deduction will benefit more than those that itemize.

Taxpayers in high-tax states like Connecticut stand to lose more than those in low-tax states because of changes to the state and local tax deduction.

Trump has said he wants to sign a tax bill by Christmas. However, the House and Senate versions of the tax bill must first be reconciled in a conference committee.

Here are the answers to seven questions Connecticut taxpayers might have about the legislation:

What is the state and local tax deduction and why is this important for Connecticut?

Tax filers who itemize can deduct what they pay in state income taxes and local property taxes from their taxable income to lower their federal tax bill. In Connecticut, 41 percent of filers took the deduction in 2015, with an average write-off of $19,664. The Senate and House tax bills eliminate the deduction for state income taxes and capped the property tax deduction at $10,000, which is expected to more adversely impact Connecticut and other high-tax states in the Northeast and Mid-Atlantic.

What if I don’t itemize?

Many Connecticut taxpayers who don’t itemize will likely see their federal taxes decrease, at least in the short term. The standard deduction will essentially double to about $12,000 for individuals and $24,000 for married couples. And the current tax brackets of 10, 15, 25, 28, 33, 35 and 39.6 percent would be cut to 10, 12, 22, 24, 32, 35 and 38.5 percent. But most of the individual tax cuts would expire after 2025.

What about the state’s wealthiest taxpayers?

According to the Tax Policy Center, the nation’s highest earners will benefit the most from the tax legislation, in part because they receive the greatest benefit from the reduction in the corporate tax rate from 35 percent to 20 percent, which unlike the individual tax cuts, will not expire.

“For our own state of Connecticut, the only real tax cuts go to [the] top 1 percent of our federal income taxpayers,” Kevin Sullivan, commissioner of the state’s Department of Revenue Services, wrote in a recent letter to U.S. Sens. Richard Blumenthal and Chris Murphy. “Everyone else would see a trivial reduction at best while many will actually owe more.”

Will cuts in taxes on corporations and businesses result in job growth and economic stimulation in Connecticut?

Some economists have their doubts. Don Klepper-Smith, an economic adviser to former Republican Gov. M. Jodi Rell, said major, publicly-traded corporations are likely to pass tax savings on to shareholders rather than their employees.

“At the end of the day, when you think about what Connecticut is, it’s a collection of haves and have-nots,” he said. “This is more likely to help the haves and not the have-nots.”

But Brian Flaherty, senior vice president of public policy at the Connecticut Business and Industry Association, said reductions in taxes on so-called “pass-through” income could help many small and midsize businesses in the state.

“This could be a shot in the arm to Connecticut businesses,” he said.

Overall, Flaherty said CBIA was taking a “watchful” approach to the Republican tax legislation and how it will play out in the state.

Are there any tax breaks for homeowners with crumbling foundations?

The Internal Revenue Service recently announced a new provision in the tax code that would allow Connecticut homeowners facing costly repairs to fix crumbling concrete foundations to write off the cost of those repairs using the casualty loss deduction. But those deductions are eliminated in the Senate bill.

Will the tax changes affect home prices in Connecticut?

The National Association of Realtors estimates home values in Connecticut could fall by more than 10 percent based on the Republican tax legislation.

“The tax incentives to own a home are baked into the overall value of homes in every state and territory across the country,” said NAR President Elizabeth Mendenhall. “When those incentives are nullified in the way this bill provides, our estimates show that home values stand to fall by an average of more than 10 percent, and even greater in high-cost areas.”

In addition to the $10,000 property tax deduction limit, the House tax bill caps the mortgage interest deduction for new loans at $500,000. According to a report from NAR, 13.3 percent of Connecticut homeowners paid more than $10,000 in property taxes in 2016 and 17.4 percent of home mortgages in the state exceeded $500,000.

Does a new tax on the income from university endowments affect any schools in Connecticut?

Yes. Yale University will be on the hook to pay a 1.4 percent tax on income on its $27.2 billion endowment. For the fiscal year ending on June 30, Yale’s endowment posted an 11.3 percent investment return.

“Many of the colleges and universities facing an endowment income tax are the economic anchors of local economies,” Douglas A. Warner, former chairman of JPMorgan Chase and a member of Yale’s board of trustees, wrote in a recent op-ed in Politico. “Yale, for example, makes voluntary payments to New Haven and other towns; it funds scholarships for any New Haven public high school graduate with a B average or higher to attend any public or private university in Connecticut; the Yale Homebuyer program has dispensed millions to employees who buy (and occupy) a home in New Haven. (Yes, the participating employees pay taxes on the benefit.) I doubt that the federal government will step in to sustain these efforts if universities are taxed.”

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