House Republicans agree with President Donald Trump that they want to cut taxes for the middle class, but who fits that definition is where the consensus stops.
For some GOP members of Congress, a middle income household tops out at $100,000 a year. For others, a family making $400,000 still deserves a break.
Whatever definition they settle on will be central to determining whether the party’s tax plan delivers on Trump’s most basic promise: a historic middle-class tax cut.
A spanner in the works for Trump’s tax plan for middle-class families. Bloomberg’s Sahil Kapur reports.
“Our framework ensures that the benefits of tax reform go to the middle class, not to the highest earners,” Trump said Wednesday in Pennsylvania. “It’s a middle-class bill.”
The debate is playing out now as House Republicans explore a compromise to cap the income level at which people would still be allowed to deduct state and local taxes, instead of eliminating the deduction altogether as proposed in their recently released tax blueprint. The definition of middle class will also be a key factor shaping where Republicans set the thresholds for individual income tax brackets.
The promised boon for the middle class is a key GOP counterpoint to charges that their plan will mostly benefit America’s highest earners. Yet nobody in Congress or the Trump administration has defined yet who counts as middle class.
It’s not surprising that lawmakers from rural Alabama may define middle class differently from those representing Manhattan.
But even Republicans from the same state can’t agree on the definition. “The middle class is whatever you want it to be in many ways,” said Jim Renacci, an Ohio Republican who sits on the Ways and Means Committee. “I think the middle class, is anywhere from zero to $80,000 to $100,000. That’s really the target zone.”
For Warren Davidson, who represents the Ohio district on the outskirts of Cincinnati where the biggest company is AK Steel Corp., middle class families could be those making up to $250,000 a year.
“I think for our district, people probably don’t start feeling like they’re middle class until they start earning $40,000 a year, and they probably still feel like they’re middle class up until about a quarter million a year,” Davidson said in an interview.
Davidson gave the example of a two-teacher household that might be able to pay the bills but struggles to put much away for future college tuition. He said those are the people who need to be keeping more of their paycheck every year.
“If those folks aren’t getting a tax cut, I don’t think we’ve gotten the tax cut right,” Davidson said.
Trump has staked out similar ground. When the president found out that eliminating state and local tax deductions could hurt some middle class families, he grew angry and demanded changes, according to two people familiar with his thinking. Nonetheless, Gary Cohn, Trump’s top economic adviser, said Thursday that the White House isn’t reconsidering its support for abolishing that break.
No Single Definition
There is no single definition among economists for what makes someone middle class, but the dividing lines usually depend on income, education, home ownership or some combination of them all.
The Pew Research Center, for example, classifies the middle class as households making between two-thirds and double the median household income -- or between $42,500 and $125,000 for a family of three in 2014. Other definitions consider whether people have a college degree or even their job type.
Americans themselves are more likely to place themselves into the middle class than any other group. In a Gallup poll released in June, 62 percent of respondents said they belong to the middle or upper-middle class.
Kevin Brady, the chairman of the House Ways and Means Committee and one of the main architects of the tax policy framework, said his panel has “not yet” identified how individual brackets will be defined. But, again, he promised that the group is “moving toward a very strong middle class tax cut.”
The policy framework published last month suggests three tax brackets for individuals -- 12 percent, 25 percent and 35 percent -- and gives congressional tax-writing committees the flexibility to add a fourth bracket for the highest earners. It also calls for a near-doubling in the standard deduction for households, a “significant,” yet unspecified increase in the child tax credit and the elimination of personal exemptions for dependents.
A study by the nonpartisan Urban-Brookings Tax Policy Center found that most middle-income families would enjoy after-tax gains under the GOP framework, but that taxes would go up for almost 30 percent of people making $50,000 to $150,000. The study said it used brackets outlined in the House GOP tax blueprint released in 2016 -- a methodology that Brady and others criticized.
Some Republicans have demanded more details of the effects of the emerging GOP plan, arguing that to sell it to voters, they need to know how different demographics in their districts will be affected.
“I want to see specifics about the impact at various income levels,” said John Faso, a New York Republican whose district covers the Catskills just north of New York City. “Everyone’s definition of middle income is going to be a bit different.”
This is an especially important distinction for those representatives from New York, New Jersey and California who are fighting to preserve the state and local tax deduction. An income level that would afford a middle class lifestyle in the most of the country doesn’t go as far in wealthy districts where good public schools and proximity to urban centers drive up property values.
Representative Peter King said families in his New Jersey district can make as much as $400,000 and still feel like part of the middle class. While he suggested that he’d be open to considering a compromise on state and local tax deductions, he rejected the idea of a cap that kicks in at an annual income of $200,000.
Democrats have also used the middle class argument to attack the emerging GOP plan. House Minority Leader Nancy Pelosi said Thursday that the plan to end the state and local tax deduction is “an insidious effort to raise taxes on middle class families,” noting that half the people who would be hit make less than $100,000.
While people at various income levels claim the deduction, most of its benefits go to those with higher incomes -- who pay higher state and local taxes. People who make more than $100,000 a year claimed about two-thirds of the total amount of SALT deductions in 2014, according to the Tax Policy Center.
With the House scheduled to be in session for only 29 more days before the end of the year, House Republicans say they need to start making some decisions soon.
“I think that’s really what needs to happen in the next week to 10 days as far as these numbers starting to slide into these bracket slots for the first time to give an idea of what that looks like,” said Mark Walker, the North Carolina congressman who chairs the conservative Republican Study Committee.
Gillian Tan is a Bloomberg Gadfly columnist covering deals and private equity. She previously was a reporter for the Wall Street Journal. She is a qualified chartered accountant.