Remember when blue states’ home values were falling and the real estate industry was blaming the new tax law? That was barely two years ago, but not many people do.
Unless you’ve been living under a rock, you know the residential market is now hotter than fish grease. Bidding wars are the norm, and any house not in contract within three weeks of being listed is viewed with suspicion.
That includes the tri-state towns hit hardest by the Republican tax reform. The 2017 law capped the state and local taxes deductible on a federal return at $10,000 — a useless amount for the many New Yorkers and New Jerseyans who pay many times more in annual property and local income taxes.
Relative to the rest of the country, state and local taxes, or SALT, are also high in California, Illinois and most other Democratic states. So these states’ real estate and political people cried foul when Donald Trump signed the tax overhaul. In red states, they snickered, as their homeowners had no SALT deduction to lose.
Predictions that Americans would move to low-tax states led home shoppers in high-tax states to bid low or not at all, perceiving that prices would drop. As a result, they did drop. It was a self-fulfilling prophecy.
Falling markets make buyers hesitant. Rising ones make them rush. Eventually, things settle down. Notwithstanding the dubious measures in the 2017 tax law, its effect on residential real estate was psychological and short-lived.
What have our policymakers learned from this? Not much.
Democrats are still furious about 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Joe Biden’s $2.3 trillion infrastructure package, or any bill that changes tax rates, unless the SALT provision is repealed. Rep. Jerrold Nadler was the top signatory.
Without their votes, infrastructure cannot pass. But Democrats are divided on repealing SALT and lack the numbers to pass that either. So neither can pass. This is the latest edition of Democrats’ perennial circular firing squad.
The real estate industry now has a choice: hand out pistols and blindfolds or get behind some kind of compromise.
Infrastructure spending is good for property values and rents. Biden’s bill not only offers real estate indirect benefits from transportation improvements and other projects but also pools of money for housing. Congressional Republicans will not contribute a single vote to it, so approval requires Democrats fixated on repealing SALT to get over it.
There is some reason to believe they will. For one thing, the politics of repeal are daunting. Rep. Alexandria Ocasio-Cortez opposes a straight SALT rollback because most of the tax savings would go to the 1 percent. (And 96 percent of the savings would go to the top 20 percent of earners.) AOC’s caucus is tiny, but with Democrats’ margin in the House so thin, that’s all she needs. And with her huge social media following, fundraising prowess and media profile, she punches well above her weight.
Moreover, she’s not alone on SALT. In its main editorial Sunday, the New York Times asked in a big headline, “Why are Democrats pushing a big tax cut for the wealthy?” The Times editorial board is not as influential as it once was, but if it matters anywhere, it’s in Nadler’s West Side district. The second signatory on the letter, Long Island’s Tom Suozzi, will be seeking the Times’ endorsement if he runs for governor next year.
If the 17 New York members lobby their colleagues or Biden himself, they are sure to hear, “Even the Times is against you.” Senate Majority Leader Charles Schumer also wants to repeal SALT, but he is not going to hold his president’s infrastructure bill hostage for it — nor tolerate such an ultimatum by fellow Democrats.
With home sales breaking records, the real estate industry cannot with a straight face argue that the deduction cap has depressed prices. It can say the tax law favored some states over others and will trigger migration to the states that benefited. But that population shift preceded the legislation.
All this adds up to a heavy lift for the SALT repealers. Their best bet is to pair it with a nationwide tax increase on high earners to counteract the benefit to rich blue-staters. But that might cost them votes from other Democrats. It’s the political equivalent of squeezing a balloon into a perfect square. What might help? Letting out the hot air.