Remember when the house values of the blue states fell and the real estate industry blamed the new tax law? That was barely two years ago, but not many people.
If you haven’t lived under a rock, you know the housing market is now hotter than fish fat. Bidding wars are the norm and any home that is not signed within three weeks of being listed is viewed with suspicion.
This includes the three-state cities hardest hit by Republican tax reform. The 2017 law limited the state and local taxes that are deductible on a federal return to $ 10,000 – a useless amount for the many New Yorkers and New Jersey residents who pay many times the annual property and income taxes.
State and local taxes (SALT) are also high in California, Illinois, and most other democratic states compared to the rest of the country. The real estate and political people of these states cried badly when Donald Trump signed the tax overhaul. In red states, they giggled as their homeowners had no salt deduction to lose.
Predictions that Americans would move to low-tax countries resulted in home buyers bidding low or not at all in high-tax countries as they saw prices falling. As a result, they fell. It was a self-fulfilling prophecy.
Falling markets leave buyers hesitant. Rising ones put her in a hurry. Eventually things calm down. Regardless of the dubious measures taken by the Tax Act of 2017, the effects on residential property have been psychological and short-lived.
What did our policy makers learn from this? Not much.
Democrats are still mad at SALT. This month, 17 of New York’s 19 House Democrats threatened not to support President Joe Biden’s $ 2.3 trillion infrastructure package or a bill to change tax rates unless the SALT provision is lifted. MP Jerrold Nadler was the chief signatory.
The infrastructure cannot pass without their votes. But the Democrats are divided over the repeal of SALT and they also lack the numbers to make it happen. So no one can happen. This is the latest edition of the Democrats’ perennial circular firing squad.
The real estate industry now has a choice: hand out guns and blindfolds or compromise.
Infrastructure spending is good for property values and rents. Biden’s bill offers real estate not only indirect benefits from transportation improvements and other projects, but also pools of money for residential purposes. Congressional Republicans won’t add a single vote, so approval requires Democrats fixated on picking up SALT to get over it.
There is reason to believe that it will. For one, the policy of repeal is daunting. MP Alexandria Ocasio-Cortez opposes a direct SALT rollback as most tax savings would be 1 percent. (And 96 percent of the savings would go to the top 20 percent of the workforce.) AOC’s caucus is tiny, but with the Democrats’ margins in the house so small, that’s all she needs. And with her large social media fan base, fundraising skills, and media profile, she beats way beyond her weight.
In addition, she is not alone on SALT. On its main editorial Sunday, the New York Times asked in a big headline, “Why are Democrats pushing for a big tax cut for the rich?” The Times editorial team isn’t as influential as it used to be, but when it comes down to it, it’s in Nadler’s West Side District. The letter’s second signatory, Tom Suozzi of Long Island, will seek approval from the Times when he runs for governor next year.
When the 17 New York members lobby their co-workers or Biden themselves, they are sure to hear, “Even the Times is against you.” Senate majority leader Charles Schumer also wants to overturn SALT, but he won’t take his president’s infrastructure bill hostage for it – nor tolerate such an ultimatum from other Democrats.
With home sales breaking records, the real estate industry cannot directly claim that the deduction cap has pushed prices down. It can be said that the tax law favors some states over others and triggers migration to the states that have benefited, but that the population shift preceded the legislation.
All of this creates a heavy lift for the SALT repealers. Your best bet is to combine it with a nationwide high income tax hike to counter the advantage for rich blue staters. But that could cost them votes from other Democrats. It’s the political equivalent of squeezing a balloon into a perfect square. What could help Let out hot air.
Contact Erik Engquist