The Fallout if 2017 Income-Tax Cuts Expire

By Richard Rubin, Max Rust and Anthony DeBarros

WASHINGTON—When Congress cut taxes in 2017, it attached a ticking countdown clock that is approaching zero.

If Congress doesn’t act by the end of 2025, income taxes will go up for most households. An analysis by the Tax Foundation shows that, on average, taxes would rise in every single county in the country—urban or rural, wealthy or poor—but the amounts vary. The analysis doesn’t speak to the median household’s tax bill, but it shows how much more people in each area would be paying.

Lawmakers in both parties say they want to avoid these increases, which amount to hundreds of billions of dollars annually. Republicans want to extend all the expiring tax cuts, while Democrats want to keep the reductions for households making under $400,000 a year.

The 2017 Tax Cuts and Jobs Act backed by then-President Donald Trump contained tax cuts—lower rates, a bigger standard deduction, a larger child tax credit, business tax breaks and relief from the alternative minimum tax. But it also contained tax increases, including the elimination of per-person exemptions, limits on itemized deductions and a $10,000 cap on deductions for state and local tax payments.

As a result, the size of each household’s tax cut—or increase— depended on its income, family structure and location. The biggest winners included top earners in states without income taxes. Residents of high-tax states such as New York and New Jersey had smaller average tax reductions.

If the tax cuts expire, many of those effects would occur in reverse, and we can now start seeing what happens if it all goes away and what will be on the agenda for the next president and Congress in 2025.

Using the estimates from the Tax Foundation—which favors lower rates and a simpler tax system—we can lay out the rough geographic differences from the tax law’s possible expiration. The key measure we’re using is average tax increase as a percentage of adjusted gross income, by county. It isn’t a perfect metric but, in general, the bigger the number, the bigger the potential tax increase for households in that county.

Full expiration of the tax law isn’t a likely outcome, but these estimates give a look at what’s at stake in what could be a contentious multitrillion-dollar negotiation in 2025. In a closely divided Congress, these geographic differences could matter as lawmakers weigh their party’s broad tax-policy positions against provisions that have particular effects on their states and districts.

Here’s a quick look at four places that stand out, including a high-tech hot spot, a retiree haven, a high-tax suburb and rural farm country.

Bay Area

Households in the top 5% of the national income distribution would get some of the biggest tax cuts if Congress extends everything—and places with concentrations of high-income workers would stand to lose if the tax cuts lapse.

That includes the Bay Area, where residents of San Francisco and San Mateo counties could experience some of the largest average tax increases, at 3.9% and 3.6%, respectively. In some cases, high-income households there would get relatively small tax increases if the law expires, because they are currently being pinched by the $10,000 cap on state and local tax deductions if that continues. Others, however, are benefiting from the 2017 changes that cut marginal tax rates and narrowed the scope of the alternative minimum tax, a parallel levy that denies state and local tax deductions but has lower rates and tended to hit people making between $200,000 and $1 million before the 2017 changes.

“They’re the workers that are driving the innovation economy that is really our golden goose,” said Patrick Kallerman, vice president for research at the Bay Area Council Economic Institute, a policy group backed by many of the region’s largest employers.

Collier County, Fla.

The past few years have brought boom times to Collier County, Fla., along the Gulf Coast, a magnet for professionals and retirees.

The influx of Midwestern retirees is still happening, said George Wilson, an estate planner in Naples. But there is a new group—people from New York and New Jersey, many in their 50s and still working finance- industry jobs, who were looking to escape high state income and estate taxes and pandemic restrictions.

The cost of living is rising, and the county’s toughest issues include the difficulty of attracting workers, many living outside Collier in more affordable places, said Kristina Park, CEO of the Greater Naples Chamber of Commerce.

Full expiration of the tax cuts would mean a tax increase of about 3.8% of adjusted gross income in Collier County.

Wilson said his clients are particularly focused on whether Congress will continue the increase in the estate- tax exemption, which roughly doubled in the 2017 law and now lets married couples shield more than $27 million in assets from the levy.

Long Island, N.Y

The $10,000 cap on state and local tax deductions is front and center in Nassau and Suffolk counties on New York’s Long Island, where property-tax bills alone often easily reach that limit.

The region’s representatives in Congress, regardless of party, agree that the cap should be raised or repealed, and they are likely to be a significant force in shaping the 2025 debate. Given Long Island’s high housing prices, another limitation in the 2017 law is coming into play; taxpayers can deduct mortgage interest on the first $750,000 of debt, down from $1 million.

Residents of Nassau County (1.6%) and Suffolk County (1.5%) would still experience net tax increases if the law expires. But those figures are among the smallest in the nation, and some Long Island residents would be among the 9% of U.S. households that would pay less in taxes if the 2017 law expires.

Rural Kansas

Residents of some lower-income rural Kansas counties would have some of the smallest tax increases in the country if the law expires.

For example, Scott County residents would experience a 1.8% tax increase and Ellis County would face a 2.1% tax increase, well below higher-income counties in the state and across the country. In many cases, lower-income households pay little or nothing in federal income taxes, so income tax cuts and expirations affect them less.

But unlike in New York, where opposition to the tax law is strong, Sen. Roger Marshall (R., Kan.) eagerly declares the 2017 law a success and wants to extend it.

“This is every bit as important to rural America as it is to urban America,” he said, noting the benefits of faster write-offs for capital investment that were part of the law. Looking at households’ tax cuts as a share of income, he said, misses the broader benefit of the law’s benefits for small businesses that employ residents of his state.