Editor’s note: This is the second in a two-part series on the effects of the 2017 tax law.
Economists delving into the effects of the 2017 Tax Cut and Jobs Act are reaching a startling conclusion. Home values for many middle class families, usually their greatest asset, have dropped about 4 percent, far more than any income tax savings enacted in the law.
The tax law capped federal deductions for state and local real estate and income taxes at $10,000 a year while eliminating some mortgage interest deductions. An analysis of the law’s impact was recently posted online by Allan Sloan, a seven-time winner of the Loeb Award, business journalism’s highest honor.
The impact varies widely across the country. Counties with high home prices and high real estate taxes and where homeowners have the biggest mortgages are suffering the biggest hit. Democrats complain the law was aimed at two of the party’s strongest areas: California and the New York City area, which historically also have the highest home prices in the country.
Sloan explained that the 4 percent drop in valuation is based on models that calculate what home buyers can afford in the way of down payments and monthly payments. Lower tax and income deductions translate into lower affordability of home mortgages. Economists say house prices have not fallen by 4 percent, but the average house price is about four percent lower that they would be without the new tax law, he noted.
Sloan said these calculations are based on economic models partially developed by Mark Zandi, chief economist of Moody’s Analytics. The Federal Reserve Board says that as of March 31, U.S. home values totaled about $26.1 trillion and home owner equity is about $15.76 trillion.. With homeowners’ equity down about 6.6 per cent from where it would otherwise be, that’s a loss of $1.04 trillion — yes, trillion with a T.
That’s a big deal to families whose biggest asset is the equity in their homes. And there are untold millions of families in this situation.
In percentage terms, the biggest loss per county was Essex County in New Jersey, a suburb of New York City, at 11.3 percent. Next were Westchester County, New York, also a suburb of the Big Apple at 11.1 percent; Union County in New Jersey, adjacent to Essex County, at 11 percent; the New York City borough of Manhattan at 10.4 percent; and Lake County, Illinois, a Chicago suburb, at 9.9 percent.
Sloan said these calculations are made when interest rates on 10-year Treasury notes are at or near record lows. But interest rates would be even lower if the Treasury was borrowing less to cover the higher budget deficits caused by the tax bill, Donald Trump’s signature legislative accomplishment since taking office.
There is one group that may be modest winners — first-time home buyers who purchased homes after the tax law took effect. They are benefiting by paying less for their home than they would have paid under the old tax rules, Sloan added.
His analysis also considered the cash people were getting from tax cuts under the new law. Households’ average federal income tax has fallen by $1,260 a year, but the medium family cut is only about half as much according to the Tax Policy Center. That’s because the tax cut is skewed in favor of higher incomes just like the tax cuts under George W. Bush.
But taxpayers from all brackets are likely to suffer because the income tax savings is small potatoes compared with the hidden loss inflicted on many of them by lower house values.
The Tax Policy Center also computed the Treasury will get $620 billion of additional revenue over a 10-year period because people can’t deduct their full state and local taxes. That in turn, covers most of the 10-year $680 billion cost of the income tax break that corporations received under the new tax law.
One other thing taxpayers should consider. The corporate tax rate dropped to 21 percent from 35 percent and that tax cut is permanent under the new law. The personal income tax cut is set to expire after eight years before returning to previous rates.
Following the math, Sloan said it’s obvious that homeowners are paying more federal income taxes in order to help corporations pay less income tax.