Congressional tax overhaul could considerably reduce the home values in high tax states and create credit risks for local governments.

High Property Taxes

According to S&P Global ratings, proposals to wipe out state and local tax deduction could directly affect the property tax payers of high tax states, as it directly disturbs the property values. Also, a credit impact is anticipated from both tax base reductions, resulting reduced revenue from lower taxes, directly affecting the local governments relying on property tax revenue.  High tax states like California, New York and New Jersey are the most affected, while Florida and Texas could reap some benefits (states with lower taxes).

The House chamber approved the tax bill version on 16th Nov 2017, terminating deductions of state income taxes and hindering property tax deductions to 10000$, while the yet to be approved Senate version to eliminate entire deductions for property taxes.

California State Controller Betty Yee, in an interview said that “This is one deduction that really strikes at the heart of middle America, particularly California”. Further, she added that she and her team is looking at property tax payers who have to look for alternate means to provide financial security. Affected people could get a home for gaining security in the longer run, but it can affect retirement security, the local budgets, state budget and credit risk for governments as well as on individuals.

She continued by saying “equity could be sucked out” of homes, as the effect spreads across the real estate market.

Betty Yee said that proposal to eliminate mortgage deductions over 500000$ is an another major issue, as California has seven cities out of the most affected ten cities, that includes San Francisco, San Jose, and Orange County.

S&P said the projected deviations in both the bills possibly lead to greater borrowing costs for municipal issuers, straining the budget.

On the flip side, these proposals are positive for the market in some ways, getting more buyers, as there could be very less issues in the upcoming days, in which the proposals turns into law. This will be an active period for issuers, as they will attempt to grab the market before next change.

Yee said that removing local and state tax deduction would add up a burden of 5.8 million. This could be a freeze on house prices and risk of some home owners is becoming more evident on mortgages. She also said that a reassessment for these properties is on its way because of declining value.

According to Laura Porter, Fitch managing director, “What it could affect is revenue growth prospects for the local government over time. That could make budgeting hard, but we wouldn’t’ see immediate impact. Over time it’s always a challenge for governments to match revenues with spending. On the state level in particular, revenue growth has been really slow,” she said, adding anything that affects the capability to increase revenues harms flexibility.