There has been a great deal of controversy and speculation about who the big winners and losers are from the recent Tax Cuts and Jobs Act. According to economists, the limits on property tax deductions could have a significant impact on the housing market.
An analysis by economists Arthur Laffer and Stephen Moore, published in the Wall Street Journal, states that upwards of 800,000 people will relocate from New York and California alone due to the change in their property tax liability. That could be good news for the Real Estate industry.
The New Tax Law Impacts Homeowners
Although other experts disagree with their findings, Laffer and Moore point to homeowners that are on the cusp of being able to afford homes in these high-value markets or are wealthy and decide the added cost isn’t worth the location.
The Wall Street Journal went as far as to headline the op-ed, “So Long, California. Sayonara, New York,” and it should be noted that Laffer and Moore reportedly advised the president about this expected phenomenon.
The conservative economists say the new law increases the true dollars and cents income tax rate for Californians from 8.5 percent to a double-digit 13 percent. The numbers look even worse for wealthy New Yorkers. One-percenters earning $10 million or more, not uncommon in Manhattan, would see a staggering tax liability increase of 50 percent or greater.
The new property tax deductions have a ceiling of only $10,000, which would barely make an impact for wealthy property owners in NYC. In conjunction with the anticipated 800,000 leaving New York and California, Connecticut, New Jersey and Minnesota could see an exodus of 500,000 all told.
“In years to come, millions of people, thousands of businesses and tens of billions of dollars of net income will flee high-tax blue states for low-tax red states,” they state in the op-ed.
Tax Law May Positively Impact The Real Estate Market
Migration is not necessarily a bad thing for the Real Estate industry. Keep in mind that high-value Manhattan or San Francisco living spaces are unlikely remain on the market long. Some of these areas enjoy waiting lists of people wanting to get into the neighborhoods. Migration would likely lead to a strong seller’s market in border states.
The economists say 3.5 million people have already left the highest tax states to live in lower ones as a cost-effective move. Neighboring New Jersey saw 46,000 millionaires take up residence in 2010, swelling its millionaire ranks to 258,000. That same year, New York saw an uptick of 84,000 millionaires and California enjoyed and additional 169,000. A Stanford University-based study concluded that 2.4 of people earning more than $1 million move each year and 2.9 percent of lower earners relocate. The tax code changes would only add to those figures.
If Laffer and Moore are correct that higher property tax liability will create migration, then we could see a significant uptick in Real Estate sales. Whether you favor the new tax law or not, the Real Estate market could be very hot going forward.