This is not tax advise and I am not your tax advisor.
Back in October 2016, the “millionaire, billionaire, private jet owners” of America’s elitist, liberal mega-cities (A.K.A. New York and San Francisco) celebrated the tax hikes that a Hillary Clinton presidency would have undoubtedly jammed down their throats proclaiming them to be a ‘patriotic duty’. Unfortunately, now that Trump has given them exactly what they apparently wanted…an amazing opportunity to ‘spread their wealth around”…they’re suddenly feeling a lot less patriotic.
Of course, as we’ve noted numerous times, while most people across the country and across the income spectrum will benefit from the Republican tax reform package, the folks who stand to lose are those living in high-tax states with expensive real estate as their SALT, mortgage interest and property tax deductions will suddenly be capped. And, as Bloomberg points out today, that has a lot of Wall Street Traders in New York drowning their sorrows in expensive vodka and considering a move to Florida.
One trader, sipping a Bloody Mary on a morning flight to somewhere more tropical, said he’s going to stop registering as a Republican. En route, he sent more than a dozen text messages ripping the tax bill.
A pair of hedge fund managers said the tax bill is too tilted toward corporations, rather than individuals who should get more relief.
“My clients are hard-working young professionals on Wall Street. I don’t have a lot of good news for them,” said Douglas Boneparth, a financial adviser in lower Manhattan who counsels people throughout the industry. Most are coming to terms with it. “I don’t think anyone is going to be surprised by the economic reality.”
“This provides a clear incentive for financial advisers to go independent,” said Louis Diamond of Diamond Consultants. “We’re hearing from a lot of clients on this; it’s just another reason why it makes a ton of sense, economically, to become self-employed.”
Of course, as we pointed out recently (see: Here’s An Interactive Map Of Which Housing Markets Get Hit The Most By The GOP Tax Bill), tax reform will likely be a double-whammy for wealthy bankers in New York and tech titans in San Francisco as their fancy McMansions may also take a pricing hit.
But, not everyone is furious. After all, there are still some tax goodies for New Yorkers such as a higher threshold for the alternative minimum tax, and a drop in the top marginal rate to 37% from 39.6%.
As an example, Mike Dean, a broker in New York for TP ICAP Plc, is keeping a positive attitude saying “It’s going to hurt, obviously” but he sees the higher taxes as tantamount to “making an investment in the future of the economy.”
Still others are considering a move to lower-taxed states like Florida and Texas which, as Todd Morgan, chairman of Bel Air Investment Advisors in Los Angeles notes, sounds like a great idea right to the point that you realize that actually entails uprooting your entire family and starting a whole new life in a different part of the country… something that generally doesn’t go over well with teenage kids…“If you’re already rich why would you move to another state and live a different life just to save some money on taxes? What are you going to do with the money? Buy more clothes? Eat more food?”
With Republicans scrambling to find every possible dollar to pay for Trump’s “massive” tax reform package, on Wednesday morning a new analysis by the CBO (congressional budget office) calculated that repealing ObamaCare’s individual mandate – an idea that had been floated previously by Trump – would save $338 billion over 10 years. CBO previously estimated repeal would save $416b over 10 years due to reduced use of Obamacare subsidies, demonstrating once again how “fluid” government forecasts are.
The report was released as the Senate prepares to unveil its own version of the Tax reform bill amid growing GOP dissent, and comes as some Republicans are pushing for repealing the mandate within tax reform, as a way to help pay for tax cuts. Still, as The Hill reports, that idea has met resistance from some Republican leaders who do not want to mix up health care and taxes. Previously the CBO had come under fire on Tuesday from Sen. Mike Lee (R-Utah), who slammed the agency after Sen. Bill Cassidy (R-La.) told The Hill that he had been informed that the CBO was changing its analysis of the mandate to find significantly less savings.
Just as notable was the CBO’s announcement that it was changing the way it analyzes the mandate, which Republicans suspect would show less government savings and fewer people becoming uninsured as a results.
“The agencies are in the process of revising their methods to estimate the repeal of the individual mandate,” he said. “However, because that work is not complete and significant changes to the individual mandate are now being considered as part of the budget reconciliation process, the agencies are publishing this update without incorporating major changes to their analytical methods.”
Sen. Tom Cotton, R-Ark., who has been one of the most vocal advocates of including repeal of the individual mandate in the tax bill, has touted the savings that would come as a result. His team said it is confident that the scoring will include similar numbers to previous reports. “We’re confident the CBO estimate will still show a substantial — north of $300 billion — savings for tax reform,” Caroline Tabler, spokeswoman for Cotton, told the Washington Examiner in an email.
CBO has been criticized for years for its analyses on the effects of the individual mandate. Republicans have charged that the mandate isn’t as effective as CBO concludes and have said they want to see it repealed. Some Obamacare supporters also have said it should be stronger by becoming more expensive or should be more heavily enforced.
While the CBO calculation is a boost to Republicans who want to repeal the mandate in tax reform, because it means there are still significant savings to be had from repealing the mandate, mandate repeal still faces long odds. Repealing the mandate – a broadly unpopular decision in many states – could also destabilize health insurance markets by removing an incentive for healthy people to enroll.
Earlier in the day, the CBO said that according to the Joint Committee on Taxation, the “Tax Cuts and Jobs Act” would increase deficits over the next decade by $1.4 trillion, which is good enough to slip under the $1.5 trillion limit required for reconciliation. The CBO did however add that the additional debt service would boost the 10-year increase in deficits to $1.7 trillion.
As discussed last Friday, several notable surprises in the proposed GOP tax bill involved real estate, and would have an explicit – and adverse – impact on not only proprietors’ tax bills, but also on future real estate values if the republican tax bill is passed. And, as the following analysis by Barclays suggests, they may have a secondary purpose: to slam real estate values in counties that by and large voted for Hillary Clinton.
Going back to Friday, the biggest surprise was that mortgage interest would only be deductible on mortgage balances up to $500K for new home purchases, down from the current $1mn threshold. Existing mortgages would be grandfathered, such that borrowers with existing loans would still be allowed to deduct interest on the first $1mn of their mortgage balances. In addition, only the first $10K of local and state property taxes would be allowed to be deducted from income. Finally, married couples seeking a tax exemption on the first $500K of capital gains upon a sale of their primary residence will need to have lived in their home for five of the past eight years, versus two out of the past five years under current rules. This capital gains tax exemption would also be gradually phased out for households that have more than $500K of income a year.
As might be expected, the above provisions caused an uproar in the realtor and home building industries, as Barclays Dennis Lee points out. The National Association of Realtors (NAR) released a statement commenting that “the bill represents a tax increase on middle-class homeowners”, with the NAR President stating that “[t]he nation’s 1.3 million Realtors cannot support a bill that takes home ownership off the table for millions of middle-class families”. Meanwhile, the chairman of the National Association of Home Builders (NAHB) stated that “[t]he House Republican tax reform plan abandons middle-class taxpayers in favor of high-income Americans and wealthy corporations”. Given the strong resistance from these two powerful housing groups, there may be changes made to these provisions in the final version of the bill.
What is more interesting, however, is a detailed analysis looking at who would be most affected by Trump’s real estate tax changes. Here, an interest pattern emerges, courtesy of Barclays.
According to CoreLogic, the median home price in the US is around $224K while the average property tax paid by homeowners in the country is around $3,300. This suggests that only a minority of homeowners are likely to be affected by the proposed mortgage interest and property tax deduction caps. Indeed, according to preliminary analysis by the NAHB, only about 7mn homes will be affected by the $500K mortgage interest deduction, and since these homeowners will receive the grandfathering benefit, they will not experience any immediate increase in taxes as a result of the mortgage interest deduction cap.
Meanwhile, approximately 3.7mn homeowners pay more than $10K in property taxes according to the NAHB. These homeowners will experience an immediate increase in taxes from the property tax deduction cap; however, to put this number in perspective, the US Census estimates that there are approximately 76mn owner-occupied homes in the country, indicating that fewer than 5% of households may experience a rise in taxes as a result of the property tax cap.
Who Is Most Impacted?
As expected, the homeowners who will be most negatively affected by the proposed caps primarily reside along the coasts, particularly in California. Using estimated median home prices provided by the NAR, Barclays found that of the 20 counties in the country with the highest median home prices, eight were located in California (Figure 3). Perhaps not surprisingly, a majority of voters in all 20 counties voted for Clinton in last year’s presidential election. In fact, Clinton won the vote in the top 45 counties in the country with the highest median home prices. Suddenly the method behind Trump’s madness becomes readily apparent…
And while we now know who will be largely impacted, there is a broader implication: not only will these pro-Clinton counties pay more in taxes, it is there that real estate values will tumbles the most. Hers’ Barclays:
We can also use the above median home prices to estimate the potential increase in taxes from the deduction caps in the first 12 months for would-be homeowners looking to purchase a home in these counties. Using the simplifying assumption that all borrowers purchase their homes at the median home price in each county and take out an 80% LTV, 30y mortgage at a 4% rate, we can come up with estimates for the monthly P&I payment for each of these areas (Figure 4). We can also estimate the average property tax burden in these counties using average state-level property tax rates.
As Dennis Lee calculates, “assuming that all of these homeowners are taxed at a marginal rate of 39.6%, we find that the increase in tax burden during the first 12 months of homeownership driven solely by the mortgage interest and property tax deduction caps varies from $0 for the county with the 20th highest median home price (San Miguel County, Colorado) to approximately $7,200 for the highest-priced county (San Francisco County, California).” Barclays’ conclusion: these counties – all of which are largely pro-Clinton – would need a 0-11% decline in their median home prices to keep the after-tax monthly mortgage and property tax payments the same for would-be buyers.
And that’s how Trump is about to punish the “bi-coastals” for voting against him: by sending their real estate values tumbling as much as 11%, while serving them with a higher tax bill to boot.
The MBA (Mortgage Bankers Association) sent a letter to the House Committee on Ways and Means regarding its recently released tax reform proposal. Given the tax proposal, the MBA reports (using its analysis of 2016 HMDA data) that only 7% of first lien home purchase mortgage balances originated in the US in 2016 exceeded $500,000. ($500,000 is the proposed maximum balance on which mortgage interest would be deductible in the House Republican proposal.) The Senate’s version, on the other hand, is expected to keep the $1 million mortgage cap unchanged.