1. News
  2. Finance News

What the tax cut proposal would mean for consumers

If you live in California, it could raise your taxes

Photo (c) LIgorko - Getty Images
The White House and Congressional Republicans have unveiled a plan to cut the corporate tax rate and reduce the number of individual tax brackets to three.

The principal objective is to make U.S. businesses more competitive and boost the economy, but the plan, if enacted as written, would also have a big impact on individual consumers.

One of the biggest changes would affect homeowners who are able to deduct state and local taxes, reducing their taxable income. Without these deductions, these consumers would likely pay a little more in federal tax; some could pay significantly more.

Would hit California consumers hard

In its analysis, the Los Angeles Times notes the changes would hit California consumers especially hard because Californians pay a lot in state taxes, which they deduct from their federal tax bill. The Times cites figures showing California taxpayers used this deduction to reduce their tax bills by $101 billion in 2014.

Democrats in Congress point out that the states where consumers would see their taxes go up the most happen to be states that usually vote Democratic in elections -- states like California, New York, Massachusetts, and New Jersey. Sen. Dianne Feinstein (D-Calif.) told the newspaper that axing this deduction is a "non-starter" for her.

While a portion of taxpayers would likely see some increase in their federal tax bill, millions more who do not itemize would probably see their taxes go down. The plan would nearly double the standard taxable income deduction from $6,300 per person to $12,000.

From seven tax brackets to three

But the savings might not be that straightforward.

Under current tax law, there are seven individual tax brackets, establishing the percentage of taxable income that must be paid. The GOP proposal reduces that to three brackets -- 12 percent, 25 percent, and a top rate of 35 percent. Consumers might end up being able to reduce their taxable income more, but still wind up with a higher tax rate.

Two major deductions -- for home mortgage interest and charitable donations -- remain intact. However, some GOP lawmakers have suggested capping the amount of mortgage interest that can be deducted at $500,000 -- which would affect mostly affluent taxpayers.

The plan also doesn't touch tax benefits for retirement savings accounts and for college tuition expenses -- tax advantages that favor mostly middle income consumers.

Lawmakers would also cut the corporate tax rate from 35 percent to 20 percent. That move is aimed at making U.S. businesses more competitive with those in other nations, where rates are lower. The plan's backers argue that U.S. corporations with billions of dollars in foreign profits deposited in overseas banks would "repatriate" those funds, stimulating the economy.

The plan's backers are counting on strong economic growth to pay for the tax cuts. As written, the plan slashes nearly $6 billion in taxes the government now receives, increasing its $20 trillion deficit.

Take a Financial Relief Quiz. Get matched with an Authorized Partner.