There was a time when the left might have cheered lowering taxes on the middle class and raising them on the rich. But not anymore. The 2017 income tax overhaul by the Trump administration reduced the personal income tax bill for most folks, but because it imposed a limit of $10,000 on the deductibility of state and local taxes, it effectively raised the federal tax bill for a lot of high income people — a very small, very wealthy percentage of the U.S. population.
The reason for the boos is because blue states like California and New York have seen an exodus of the wealthy in the last two years since the limit was imposed. These two states, home of San Francisco and New York City, respectively, have the highest-priced real estate in the country on average. And high real estate values means high property taxes — taxes that cost homeowners well over $10,000 per year and therefore limit their tax deduction. So, rather than pay even more, the rich are moving out of state.
Governors in these — and other — high-tax mostly blue states decry the exodus. They say that the loss of the upper earners — the folks who own expensive homes — is reducing their state tax revenues. It’s true, the people leaving do pay the most, not only in local property taxes, but also in state income taxes. The transfer of the wealthy’s tax revenue from, say New York to Florida for example, is real, and in this case the governors are right.
However, the imposition of the $10,000 deductibility limit was actually to appease the liberal crowd for cutting federal income taxes on the middle class, but effectively raising them on the wealthy. Of course, the definition of “wealthy” depends on who you ask. In California, for example, where the median home price is about $600,000, to qualify for the typical conforming mortgage you need to make about $100,000 per year — roughly double the national average. And, if you live there and are average and not wealthy by California standards, you’ll pay more than $10,000 in combined state income and local property taxes. Why not leave?
But, other than high property values and high tax rates, what else do the states of New York and California have in common? Both have high rates of homelessness and a lack of affordable housing. In fact, New York City and San Francisco rank in the top five cities in America in those categories. But, now enter the law of unintended consequences.
Because both states are seeing a dramatic — almost unprecedented — exodus of the wealthy because of the deductibility limit, the demand for properties in these states is declining and the supply is increasing. A reduction in demand and an increase in supply always has the same effect — lower prices. That’s code words for affordability.
The Wall Street Journal recently reported that the 10 states most affected by the new tax law saw property prices rise last year by only about 2.5 percent — down from almost 7 percent growth a year earlier. States unaffected by the tax law saw no change in the rate of property appreciation, holding steady at about 4 percent.
More to the point, the New York appraisal firm Miller Samuel reported a decline of about 6 percent in the price of Manhattan real estate since 2017, while University of Califronia-Berkeley economist Ken Rosen sees San Francisco prices as flat to decreasing by 2 percent. Guess the cities with the highest rates of homelessness and the highest rates of wealth flight.
California Gov. Gavin Newsom crowed last year that he had signed 18 bills for affordable housing, and his New York counterpart, Gov. Andrew Cuomo, launched a $20 billion affordable housing initiative in his state two years ago. While they both cry poor over the exodus of the wealthy and the resulting loss of state tax revenue, they should be applauding its effect on bringing down housing prices.
To be sure, even a dump in New York City or San Francisco is still hardly affordable for most. Those cities do have the highest property prices anywhere in America, but they are coming down, not going up like in the rest of the country. The law of unintended consequences.
• Kevin Cochrane teaches business and economics at Colorado Mesa University, and is a visiting professor of economics at the University of International Relations in Beijing.