Bum Deal for Left-Leaning States? The Impact of the New Trump Tax Bill on Homeowners
The recently passed Tax Cuts and Jobs Act of 2017 makes significant changes to longstanding tax benefits for homeowners: (1) the cap on the mortgage interest deduction has been reduced from $1 million to $750,000; (2) deductions for state and local taxes, including property taxes, have been capped at $10,000; and (3) standard deductions have been doubled, such that fewer homeowners will itemize their tax filings.
The new legislation hits homeowners hardest in the expensive coastal markets across California and throughout the Northeast. A homeowner with a median-priced home in the San Francisco metro will receive approximately $4,500 dollars less annually in housing tax deductions under the new plan; in the Boston metro, the median homeowner will receive $1,700 less. For Bay Area homeowners of median-priced homes, the lost deductions could total more than $100,00 over the course of a 30-year mortgage.
The impact of the changes is felt disproportionately in left-leaning parts of the country. There are 15 states in which the median homeowner will receive at least $100 less in housing tax deductions under the new plan -- President Trump carried none of these states in the 2016 election.
With the increased standard deduction, many households who lose housing tax deductions may still end up with a lower overall tax bill, though the loss of housing deductions still amounts to a shifting of incentives that make homeownership less attractive. That said, the decision to purchase a home is affected by numerous factors; changes to the tax code will likely have limited impact on that decision in most parts of the country, but could be more impactful in the nation’s most expensive markets.
What has changed for homeowners under the new Trump tax code?
The Tax Cuts and Jobs Act, signed into law on December 22, is the signature achievement of President Trump’s first year in office. The new law makes significant changes to longstanding tax benefits for homeowners -- the cap on borrowing subject to the mortgage interest deduction (MID) has been reduced from $1 million to $750,000, and deductions for state and local taxes, including property taxes, have been capped at $10,000.1
These changes, in combination with a doubling of the standard deduction, mean that many homeowners will experience a loss of tax benefits associated with homeownership. This represents a significant shift in the federal government’s attitude toward homeownership. The federal government has been subsidizing homeownership on a large scale since WWII, when the G.I. Bill helped usher in a period of rapid growth in homeownership. In 1940, only 43.5 percent of households owned their home; by 1960, the homeownership rate had risen to 61.9 percent. More recently, Presidents Clinton and George W. Bush both took notable actions aimed at increasing homeownership.
Government subsidies for homeownership have long been justified by the belief that widespread homeownership is beneficial for society, but in recent years, this assumption has come into question. When the initial version of President Trump’s tax plan was first announced, we argued that federal funds used to subsidize homeownership could be put to better use, for example, by expanding programs for low-income rental assistance. The new tax code takes away benefits for homeowners, but there has been no talk of increasing funding for other housing-related programs.
The reduction in housing-related benefits under the new tax code may reflect a shifting of attitudes around homeownership, and the changes serve as a striking rebuke of the National Association of Realtors, one of the nation’s most powerful lobbying groups. While many homeowners will see their overall tax bills decline under the new plan -- at least in the short term -- the loss of housing deductions amounts to a shifting of incentives that make homeownership less attractive. Notably, the new Trump tax code has a disproportionately negative impact on homeowners in left-leaning states that voted for Hillary Clinton.
In order to better understand the impact of the changes on individual households, Apartment List estimates the difference in housing tax benefits before and after the changes take effect for homeowners at various housing price points across the country.
Where are homeowners most impacted by the change?
Looking at county-level home values across the U.S., we analyzed the impact to owners with home values at the 25th, 50th and 75th percentiles -- in other words, below, at and above the median -- of their local markets. We assume a three-person household consisting of a married couple who files their taxes jointly, with a single dependent child, and estimate their overall tax bill and the value of housing-related benefits under the previous and current tax codes.2
Areas shaded green in the above map are counties where only homeowners with the most expensive homes will experience a loss of housing tax deductions; in these places, most homeowners were taking the standard deduction before the tax reform and will continue to do so. At the other end of the spectrum, in areas shaded red, even owners of the county’s least expensive homes will lose deductions.
These regional disparities are closely tied to median home values, with more expensive markets being hit harder. That said, local income and property taxes also play a role, with the biggest impacts seen in areas that have a combination of high home values and high local taxes. In particular, homeowners in California and northeastern states, such as Massachusetts, New York and New Jersey, will see some of the biggest losses. In fact, the top five hardest-hit metros are located in California, and, of the next five hardest hit, four are in the Northeast.
Over the course of a 30-year mortgage, the loss of housing tax deductions could total more than $100,000 for owners of median-priced homes in the Bay Area.3 Note that these figures will be significantly impacted by the degree to which home prices in these markets respond to the loss of tax benefits, one of the biggest outstanding questions related to the reform.
Interestingly, the impact to homeowners is also closely tied to results of the 2016 presidential election:
At the state level, there are 15 states in which the median homeowner would see a reduction in homeowner tax benefits of more than $100 per year, and these are all states that Hillary Clinton won in the 2016 election. Meanwhile, in states where President Trump received the strongest support, very few homeowners will be impacted by the changes. Across all states where the median homeowner will lose housing tax deductions, Hillary Clinton won by a margin of 20 percentage points, while in the states where the median homeowner will not be affected, President Trump won by a margin of 14 percentage points.
What implications does this have for the housing market?
It’s important to note that, in the near-term, homeowners who lose housing tax benefits aren’t necessarily worse off. Because of the higher standard deduction, some of the households that lose homeowner benefits will still see a reduction in their overall tax bill. For these households, the biggest implication for the housing market is a shifting of incentives away from homeownership. That said, the decision to purchase a home is a complex one with many factors, including preferences around geographic mobility and the ability to personalize one’s home. In most places, the financial impact of the tax code changes will be small enough that there is unlikely to be a significant impact on home buying decisions.
However, in some of the nation’s most expensive markets, the effect could be larger. In coastal hubs, such as San Francisco, New York, Boston and D.C., many homeowners stand to lose thousands of dollars in housing tax benefits. For some households in these areas, the tax code changes could be the final straw that causes them to begin looking to other parts of the country in search of a more affordable place to call home, a trend which may have already begun. Because of the disproportionate impact on left-leaning states, some have even argued that this shifting of incentives could spark an influx of Democratic voters moving to red states, a result that could amount to a significant political backfire for President Trump. On the other hand, the impact on migration patterns may be muted by a dip in home prices in the hardest hit markets. Yet another factor at play is the disincentive to move for homeowners with existing mortgages over $750,000, which could serve to worsen a lack of inventory in some markets.
While the final impact of the new tax code on the housing market remains to be seen, the changes represent a significant scaling back of one the primary ways in which the government promotes homeownership.
Check the table below to see how the changes will impact homeowners in your area, at the state, metro, county, or city level:
First-year loss of housing tax deductions
Home value estimates at the 25th, 50th and 75th percentiles are taken from the 2016 Census American Community Survey. State-level calculations are based on one-year ACS estimates, while CBSA-, county- and city-level calculations are based on five-year estimates. In all calculations, we assume a three-person household consisting of a married couple who files their taxes jointly, with a single child. Household income is assumed to be one-fourth of home value. For local income and property taxes, we assume state-level averages taken from tax-rates.org. We assume that each household has made a 20 percent down payment, with the remaining balance subject to a 30-year fixed rate mortgage at the prevailing average interest rate of 4.3 percent.
- Note that the lowering of the MID cap does not apply to homeowners with existing mortgages.↩
- The analysis considers the impact on new homeowners. That being the case, it includes the impact of the lower MID cap, even though this change does not affect existing mortgages.↩
- There a number of factors influencing the total loss of housing deductions over the life of a 30-year mortgage. For simplicity, and because of the uncertainty surrounding some of these key factors, the estimates shown above hold the assumptions of our first year model constant, with the exception of the evolving allocation of mortgage payments between interest and principal. Specifically, we do not account for changes in home value or income, the expiration of individual tax cuts, or potential changes in local income and property tax rates.↩