Long on ambition, short on details, President Donald Trump’s promise of the biggest overhaul in the history of the American tax system could jolt the Bay Area, shaking up the housing market, afflicting charities and prodding tech giants to bring billions of their assets back home from abroad.
The Trump administration unveiled a broad outline of its tax plan Wednesday, proposing major cuts in the individual and corporate tax rates while eliminating many deductions. The proposal was released on a single sheet of paper — double-spaced — without any information about how the cuts would be paid for.
But if the proposals became law, an early look at the impact on the tax bills of Californians shows the implications could be profound
Overall, Trump’s reforms would likely mean a simpler process for tax filers. Instead of the current seven income brackets, ranging from 10% to 39.6%, there would be three brackets, at 10%, 25% and 35%, and a raft of tax deductions would be eliminated. There’s no word yet on what income ranges would fall into each bracket.
The biggest deduction California residents would miss is the state and local tax deduction, which lets people deduct the payments they make for state and local taxes from their federal tax bill. In 2014, the latest year with data available, Californians deducted $101 billion from their federal taxes thanks to this deduction, more than any other state in the country.
“That’s a big deal for people in high income tax states like California,” said Annette Nellen, a San Jose State University business professor who studies tax law.
Trump’s tax proposal would double the standard deduction and eliminate most individual tax deductions other than those for a home mortgage and charitable gifts. Tax experts say that would mean more people choose to take the standard deduction instead of itemizing.
For a married couple filing jointly, for example, the standard deduction would double under Trump’s plan from the current $12,600 to $25,200. If the couple had $500,000 in mortgage debt and were paying a 4 percent interest rate, they’d be eligible for a mortgage deduction of just $20,000 — so it would likely make more sense for them to take the standard deduction, Nellen said.
More people taking the standard deduction could mean less incentive to donate to charity. “Some charities might see a drop in donations, because it won’t matter for people’s taxes,” Nellen said.
It could also be a blow to the home-buying industry. Deducting mortgage interest can be a real incentive for people to buy homes, especially in a place like the Bay Area with such sky-high real estate prices.
Denise Welsh, the president of the Silicon Valley Association of Realtors, said getting rid of the state and local tax deduction — which includes property taxes — and incentivizing the standard deduction could “cripple” the Bay Area housing market.
“Our whole housing market is intertwined by those tax deductions,” she said. “Eliminating those deductions may not impact people in some parts of the country, but it certainly would have a very significant impact to the local area.”
She said many of her clients who took out large home mortgages planned their entire finances around their tax deductions, and would flee California rather than pay the sky-high property taxes without being able to deduct them. “People are not going to move down from their $2.5 million dollar home in Los Altos to the dregs of San Jose in a 1,250-square-foot home,” Welsh said. “They’d leave the state.”
Meanwhile, the tax proposals would have some measures that could make high-income people dance. Notably, the plan would end the Net Investment Income Tax, which levels 3.8% on business and investment income for people with high incomes in part to pay for the Affordable Care Act. “For some really high income people — like the top two percent — it’s in the millions of dollars of taxes,” Nellen said.
The plan would also eliminate the federal estate tax and would be a boon for wealthy families who hope to pass on their wealth. And it would also “provide tax relief for families with child and dependent care expenses,” according to the summary.
With leading Silicon Valley technology companies parking hundreds of billions of dollars in cash overseas to avoid U.S. taxes, a lower corporate tax rate could encourage firms to stop hoarding money outside the country.
All five of the top overseas cash holders are tech companies, and four of them are headquartered in Silicon Valley, according to Moody’s. As of the end of September, Apple had $216 billion overseas; Google had $48 billion; Cisco had $60 billion; Oracle had $51 billion; and Microsoft had $111 billion, Moody’s reported in November.
With European countries taking aim at tech firms’ holdings — the European Commission ruled in August that Apple must pay $14.5 billion in taxes Ireland failed to collect from the company — the valley’s tech titans have good reason to keep cash at home, said Joe Kennedy, a senior fellow at the Information Technology & Innovation Foundation, a think tank sponsored by several tech companies.
Many firms that park money offshore end up paying a much lower tax rate than the U.S. 35 percent corporate rate. Apple, according to its most recent quarterly report, paid a 26 percent effective rate, while Google has reported a 19 percent rate, Facebook has reported 18 percent and Oracle 17 percent.
“From a Silicon Valley point of view, they all want to pay lower taxes, but I don’t think (a reduced corporate rate) is going to have a major impact. They are in many cases paying lower tax rates,” said International Business Strategies analyst Handel Jones.
Analysts expect that political wrangling over paying for tax cuts will ultimately mean a higher corporate rate than 15 percent.
The Trump plan also proposed a “one-time tax” on overseas cash brought back to the U.S., but did not specify a rate. The repatriation is expected to be mandatory.
“That’s a big deal,” Jones said.
However, firms benefiting from the change would not necessarily invest in their companies. Jones believes about 20 percent of repatriated cash would go to acquisitions, with about 80 percent returned to shareholders.
The plan would also reduce the tax rate for “pass-through” businesses, which include partnerships of doctors and lawyers and sprawling real estate partnerships like those Trump ran himself.
Aside from tech giants, small businesses in the Bay Area would applaud a lower corporate tax rate, said Steve Van Dorn, the president of the Pleasant Hill Chamber of Commerce.
“Whenever you say ‘tax cuts,’ most business owners are excited about that, especially in the state of California,” Van Dorn said. “That helps businesses grow and spend more on capital improvements and all those economic development things.”