Rich homeowners in blue states are among the biggest losers in the GOP tax plan
- The GOP's tax bill is set to disproportionately impact homeowners in affluent parts of the US.
- Wealthier households are currently more likely to take advantage of key tax breaks that could be downsized, including the mortgage interest deduction, and the state and local tax (SALT).
- Although this could weaken buying activity and prices, the high end of the housing market is also the smallest by share.
- States that would be most impacted include New York, California, Connecticut, and Hawaii. The majority happen to also be blue states.
The GOP's tax plan is likely to advantage wealthy Americans in a number of ways, including estate-tax and private-tuition benefits.Where the housing market is concerned, proposed changes - particularly those in the House version of the bill - are set to disproportionately affect wealthier homeowners.
Many of the states with the most expensive housing markets, which include California, New York, and Hawaii also happen to lean Democratic . And while it might be a stretch to say the tax changes target blue states, they almost certainly would hurt high-income areas more.
Two policy proposals in the House and Senate versions of the bill are worth noting. First is the mortgage interest deduction, which helps homeowners lower their taxable income.
The Senate's bill leaves the threshold of the first $1,000,000 of a mortgage unchanged. But it also hikes the standard deduction for all taxpayers, meaning it may no longer be better for some households to itemize the mortgage interest deduction since it would be lower than the standard deduction.
The House's plan is more significant. It halves the mortgage interest deduction to the first $500,000 of a loan.
Richer states lose more
Housing interest groups fear that scaling back tax incentives would slump home prices in the most expensive markets and discourage existing homeowners from moving.The exact impact on home prices is anyone's guess. At one end, the National Association of Homebuilders has warned about a housing recession .
But it may not be that bad. Just 9.4% of owner-occupied homes have a mortgage more than $500,000, Credit Suisse analysts estimated. Additionally, the median price for a single-family home was $245,500 on a trailing 12-month basis through October.
This implies that the majority of homeowners don't qualify for this tax benefit at present.
But the bottom line is the GOP's proposals will impact wealthier, bluer homeowners more than others.
Would they hurt home sales?
The argument for lower prices and sales is premised on the idea that fewer tax benefits deter homebuying. The House's mortgage interest deduction cap only applies to new purchases, so existing homeowners may become reluctant to move.
"While more disposable income for buyers is positive for housing, the loss of tax benefits for owners could lead to fewer sales and impact prices negatively over time with the largest impact on markets with higher prices and incomes," said Danielle Hale, the chief economist at Realtor.com.
But it's also worth considering why people buy homes."A very small fraction of the home buying public actually makes the purchase price decision based on their tax deduction," said Tom Porcelli and Jacob Oubina, economists at RBC Capital Markets, in a note.
Even in a perfect world where buyers are rational, they added, the price changes would be within the boundaries of normal price negotiation that happens in any homebuying transaction. "D on't forget that parties in the transaction are already willing to concede about 5% to real estate brokers," they said.
Also, price drops at the highest end of the market would have a minimal macro effect because it's also the smallest end of the market by share.
The bottom line is that America's most expensive households will be the places to watch for how the GOP's tax plan impacts the housing market.
The second proposal that could hit wealthier homeowners is a repeal of the state and local tax (SALT) deduction, which allows Americans to lower the share of their taxable federal income. Removing the option to make this deduction would immediately amount to a tax increase for wealthier households.
High-income households are more likely to benefit from SALT and claim the deduction compared to other income groups, the center's research found. Among households earning $200,000 to $300,000 per year, 93% claimed the SALT deduction, compared to 39% of households earning $50,000 to $75,000.
According to the Tax Policy Center , state income, local income, and real-estate taxes make up the bulk of the SALT deduction.
That disadvantages states like New York which have high state and local taxes, and where taxpayers itemize these deductions instead of taking the standard deduction.
And so instead of the promised tax cuts, many could be paying more to the federal government.