Emma Carroll, a UC Berkeley grad student, is thinking about taking out loans just to pay what could be a substantially higher tax bill.
Jerry Pohorsky, an engineer in Santa Clara, might put off his plans to buy a new electric vehicle if a federal tax credit gets cut.
And John Hansen, an attorney in Castro Valley, is considering moving to Georgia in part to avoid paying some California income and property tax he could no longer deduct from his federal bill.
As Republicans square the last details of President Donald Trump’s massive tax overhaul before a final vote in Congress, many Bay Area residents are running the numbers and worrying that they’ll end up paying more.
The plan is the biggest rethinking of America’s tax code in a generation, though it’s still a work in progress, with a congressional committee ironing out differences in versions passed by the House and Senate. For many people around the country, it will mean lower tax rates and a simplified filing process. Trump and other supporters say it will jump-start the economy and generate jobs.
But the bill slashes many housing and state-tax deductions that are popular in the Bay Area. California’s high taxes and the Bay Area’s high home prices will likely make our region one of the most adversely affected places in the country, and accountants and tax experts say there’s not much taxpayers can do to avoid it.
“Given the way the tax bills are written now, the Bay Area is certainly a big loser from this plan,” said Jack Citrin, a UC Berkeley professor who has written a book about California tax policy.
Both bills will ax the deductions for state income tax. That won’t be a big deal for most Americans, but California has some of the highest income taxes in the country — and nearly half of Bay Area residents take advantage of the state and local tax deductions. Of the top 7 U.S. counties with the highest average state and local tax deduction, four — San Mateo, Marin, San Francisco and Santa Clara — are in the Bay Area, according to IRS data.
The tax plan also limits some of the biggest financial incentives for buying and owning a home. Both versions of the bill cap the property tax deduction at $10,000, while the House version limits the mortgage interest deduction to loans of up to $500,000, down from the current $1 million. (Existing loans would be grandfathered in.) The median Bay Area home price is about $800,000, compared with about $200,000 nationwide.
“This doesn’t affect 95 percent of homeowners in the country, but it affects basically everybody here,” said Joseph Salazar, a tax specialist and financial adviser in San Jose. “If you have a young couple looking to buy their first house, why would they want to move here?”
Salazar predicted that without these big financial incentives to buy a home, the Bay Area could see a slump in the housing market and a growing percentage of renters. However, he said people shouldn’t necessarily plan on selling their home, as the bill also makes fewer homeowners exempt from paying capital gains tax on the profit from selling their house.
Losing the deductions is a big deal for Hansen. Though the interest deduction from his more-than-$500,000 mortgage would be grandfathered in under the tax plan, he would lose the state and local tax deduction that he says has helped save him “a substantial amount of money.” He expects his tax bill to go up under the GOP plan.
“Maybe the only answer is to move to another state,” said Hansen, who said this could be another incentive for him and his wife to move to Atlanta to be closer to their grandkids. As a Democrat, he said he thought Trump and Republicans were trying to write a tax bill with increases that “mostly affect people who don’t vote for them.”
Even some of Trump’s biggest local fans are questioning the tax plan’s effect on their pocketbooks. Lori Drake, the former chair of the Alameda County Republican Party, said she supported the idea of simplifying the tax code and most of the bill, but opposed getting rid of deductions for state income and property tax, which she uses.
“We should be against that,” she said, “because it’s not fair to get double-taxed on anything.”
Losing those deductions isn’t bad news for everyone in the Bay Area. The bill would nearly double the standard deduction, raising it to $12,000 for individuals or $24,000 for married couples, and most people who take the standard deduction can expect to pay fewer taxes under the bill. The Senate bill also would double the child tax credit, to $2,000 per child, while the House bill would raise it to $1,600.
The Bay Area residents who will benefit from the tax plan, accountants predict, include renters with relatively low incomes who don’t pay a lot of state income tax and retirees who don’t have outstanding mortgages. The super-rich will also likely see reduced tax rates outweigh their lost deductions, and will benefit from other provisions like a reduction of the estate tax.
“Looking at our situation, I think it’s going to be a better deal,” said Bob Jackson, 65, a San Jose Democrat and retired mail carrier. He and his wife take the standard deduction and have no mortgage on their mobile home, which they rent a space for instead of paying property tax. “It’s good for people like us.”
On the other hand, the bill could mean higher taxes for graduate students like Carroll, who’s halfway through her six-year PhD program in molecular and cell biology. The university waives $13,000 of her tuition each year for doing research. Under the House bill — but not the Senate bill — that waived tuition would now be considered taxable income, added to the $35,000 annual research stipend she currently pays taxes on.
She’s estimated if the House bill passes, she’d have to pay about $1,500 a year in new taxes, although some of that could be mitigated by the higher standard deduction. She’s planning to take out loans to pay for that.
“If I have to pay taxes on a considerably larger amount of money that I never actually make, it’s going to be hard to continue my studies,” said Carroll, who did not want her political affiliation disclosed.
Some students have called on Berkeley and other universities to help support graduate students if the tax change goes through, possibly by reducing their tuition. Meanwhile, the House bill also repeals a provision that allows current and former students to deduct up to $2,500 in student loan interest.
Other tax provisions that are popular in the Bay Area and could be lost include the $7,500 credit for the purchase of an electric vehicle, which helps make some EV prices comparable with gasoline cars. The Senate bill keeps the credit, but the House bill nixes it.
That’s bad news for electric vehicle aficionados like Pohorsky, a former president of the Electric Auto Association of Silicon Valley. He bought his current ride, an electric Toyota RAV 4, in 2002, when plug-in cars were still a curiosity. After 15 years, it’s losing battery capacity and showing its wear, so Pohorsky has been planning to buy a new Chevy Bolt.
But without the $7,500 credit, he’s not sure he’d buy the $36,600 car. It’s a calculation that could lead many like him away from EV purchases.
“It will slow down electric vehicle adoption for sure, and that affects all of us,” said Pohorsky, a Republican. “The number of electric cars on the road is only about 2 percent, so we still have 98 percent of the population to convert.”
The tax bill also cuts deductions for victims of disasters like earthquakes, wildfires and hurricanes. There are special exceptions for victims of Hurricanes Harvey, Irma and Maria — but not for those hit by the blazes that devastated the North Bay. (Republican leaders have said they plan to pass separate legislation for California wildfire victims.)
Still, there are many in the Bay Area like Jan Soule, a San Jose Republican retiree from the tech industry, who says the tax plan “makes sense.” The house she and her husband have owned for decades is paid off, and they have relatively low property taxes thanks to California’s Proposition 13 — so they won’t miss many of the deductions.
She doesn’t believe her party is using it to punish blue states. And if some Californians are angry about having to pay a higher tax bill, Soule said, “maybe they’ll wake up to the fact that our state taxes are out of control.”