Buried In The HEROS Act, A Plan To Restore SALT Tax Deductions Could Add $1 Trillion In Housing Value

On May 15, Congress passed a $3-trillion stimulus bill called the HEROES Act. Buried inside the bill is a measure that would reinstate the so-called SALT itemized deductions for 2020 and 2021. The bill now goes to the Senate, where it will be picked over, and according to many observers, this provision has no chance to survive.

It bears repeating that the SALT tax allowed individuals to write off state and local taxes and had been a part of the United States tax code since it was established in 1913. The concept was to get a tax credit for the services the federal government didn’t provide—like local police forces and schools. In January 2018, it fell victim to the Tax Cuts and Jobs Act that capped state and local deductions at $10,000. The law also reduced the mortgage interest deduction from $1 million to $750,000. The change in the tax law was basically to offset revenue lost from the 40% tax break awarded to corporations.

Nothing has done more harm to housing value than eliminating SALT deductions. It’s been particularly devastating in Manhattan. Over the last two years, the number of signed contracts in the Manhattan luxury market that I cover in has declined by 23%. The New York State Association of Realtors, which keeps data outside of New York City, has reported a 3.2% decline in the number of closed sales over the last two years.

In October, Mark Zandi, chief economist for Moody’s Analytics, estimated that the changes in the SALT tax curtailed home values from appreciating at a typical annual rate of 4%, costing $1 trillion in U.S. home value.

Recently, Fitch Ratings conducted a survey of 10 states with the highest property taxes and mortgage interest deductions versus the 10 states with the lowest property tax and interest deductions. In the high-cost, high-tax states like New York, California and New Jersey, the average year-over-year price appreciation fell from 6.4% in January 2018 to 2.7% in September 2019. In the low-cost, low-tax states like Kentucky and Alabama, the appreciation rose an insignificant 3.9% to 4%. And this was before COVID-19 roiled the housing market.

Moody’s Zandi said: “For the very wealthy who have large stock portfolios, they may say, ok, I lost a little bit on my house but I gained a lot on my stocks. But for middle- income Americans who don’t own a lot of stocks and their house is the key asset that they own—-and that’s the case for most middle-American households—the tax law was a negative, because they lost a lot more from the reduction in housing value compared to what was gained in rising stock value. For middle-American households, the tax law probably made them less wealthy, not more wealthy.”

According to Urban-Brookings Tax Policy Center (TCP), 80% of tax filers with incomes at $100,000 or more were taking the SALT deductions prior to the change in the tax law. That may sound like a hefty income, but in a high-cost state like New York, many teachers, healthcare workers and first responders earn above $100,000—especially if they work overtime. These are homeowners who relied on the deduction in calculating the affordability of their home.  

Over my 40-year career as a real estate broker, I’ve learned one immutable fact: Almost every buyer has a budget that contemplates monthly costs and after-tax consequences of their purchase. It’s simple math: the higher the real estate taxes, the lower the property value.  New York homeowners have exorbitantly high property and income taxes, which support an expensive infrastructure. New York City residents pay almost 13% in state and local income taxes—and that doesn’t even include property taxes. Without the ability to deduct the taxes, it has caused some residents to flee to other states.

Last year, for example, 84-year-old billionaire Carl Icahn left New York with his hedge fund for Florida. Imagine the revenue the state lost on Icahn’s taxes. When billionaires and millionaires walk, the state comes up short for schools, roads, hospitals, and other services. New York Governor Andrew Cuomo has claimed that the SALT tax has cost the state $29 billion annually. It takes a lot of money to run New York, which is the 11^th largest economy in the world and represents 8% of the nation’s GDP.

Setting aside all the factors above, we now find ourselves in a pandemic that magnifies the prospect of significant harm to housing. You can’t have 33 million Americans out of work and expect real estate values to hold up. There is an old maxim that housing “punches above its weight.” Home sales benefit a host of businesses, including banks, contractors, electricians, plumbers, landscapers, manufacturers of appliances, electronics and furniture—the list goes on and on.

Housing is a primary driver of the US economy. The pandemic has fueled the need to jump start housing immediately, and one way to do it is by restoring the SALT deductions. The current tax law is set to expire in 2025—and that’s not soon enough for the nation’s homeowners.