Until the Tax Cuts and Jobs Act (TCJA), people across the income distribution could say they benefited from the tax code’s many targeted tax benefits. But, according to a new analysis by the Tax Policy Center, the benefits of many itemized deductions have shifted from middle-income households to those with higher incomes.
The change was largely driven by two elements of the TCJA: Its increase in the standard deduction and its $10,000 cap on the state and local tax deduction. Combined with other changes, they resulted in a big decline in the number of people itemizing deductions.
That shift in turn has important implications for the political sustainability of some popular tax subsidies. For instance, will deductions for mortgage interest and charitable giving survive once voters--and lawmakers—realize they increasingly have become cash cows primarily for the wealthy?
The mortgage deduction
For example, in 2017 about 16 percent of middle-income households (those making between about $49,000 and $85,000), benefited from the mortgage interest deduction (MID). In 2018, fewer than 5 percent will receive any benefit from the MID. Overall, middle-income households received about 6.4 percent of the total tax benefit of the MID in 2017 but will get one-third less, only 4.3 percent, in 2018. These effects would reverse after 2026 should the TCJA’s individual income tax changes expire as scheduled.
Take a look at households in the 80th-90th slice of the income distribution, those who made between $152,000 and $220,000 last year. Even their share of benefits from the MID has collapsed. Last year, almost two-thirds took the mortgage deduction. This year, fewer than one-quarter will. Their overall share of the tax break will fall from 22.4 percent in 2017 to 17.1 percent this year.