As homeowners in several states swarm tax offices to pre-pay their 2018 local taxes and avoid costly changes contained in the federal tax reform bill, Michigan taxpayers have no worries.
Because Michigan has one of the lowest income taxes – based on the top rate of 4.25 percent – few residents will be affected by the new $10,000 limit on IRS deductions for state and local taxes. In addition, across Michigan few homeowners pay relatively large amounts of local property taxes, other than in Oakland and Washtenaw counties.
But in high-tax states on the East and West Coasts, the $10,000 cap that takes effect Jan. 1 has generated a frenzy of activity, with homeowners trying to pay their 2018 property taxes in advance, based on the existing 2017 tax laws that allow unlimited federal deductions.
Taxpayers who itemize can deduct their property taxes plus their choice of state income or sales taxes paid on a yearly basis. The deduction is especially popular in high-income states. In Maryland, for example, nearly half of all taxpayers write off their state and local taxes.
Since President Trump signed the tax reform bill into law, local tax collectors have been inundated with calls and visits from taxpayers about the impact of the federal tax reform law in California and several East Coast states: New York, New Jersey, Maryland and Virginia, plus the District of Columbia.
While no official or estimated figures have been released yet for Michigan, the Great Lakes State will surely feel little impact.
Beyond that, the ongoing narrative among some political pundits that the new restrictions were designed by a Republican Congress to punish Blue States is not based on the evidence.
As Matthew Yglesias of the Vox news site pointed out on Twitter, the “culture war” aspect of this controversy is overblown. The $10,000 cap is a progressive tax change that mostly affects the wealthy and upper middle class.
Solid Blue States such as Massachusetts and Illinois have lower income tax rates than deep Red States such as Nebraska and Idaho. High property tax levies (see map below) in California mostly apply to those who live on or near the ocean, and in Maryland and Virginia they are largely a factor only for those who live close to Washington, D.C. Texas stands as one of the states with the highest widespread property tax bills, well above the national average.
Based on figures compiled by the nonpartisan Tax Foundation (see map above) Michigan’s top income tax rate is lower than those levied in Red States such as South Carolina, Alabama, Oklahoma and Montana. Only a handful of states have a lower rate than Michigan, in part because our state is one of the few that levies a flat tax on income. Most states have several tax brackets (while seven states have no income tax).