Many people are currently focused on the “tax cut” bills working their way through the national legislature. The House and the Senate each have different ideas about the best way to get tax cuts done, and these differences will have to be worked out in Conference Committee after each august body passes what it thinks is the best way forward.
I’m not going to debate who will benefit the most from these tax cut bills—notice they’ve dropped all pretense to tax reform. I’m not going to debate the merits of a plan everyone from Forbes to Gary Cohn call “trickle down economics,” although I will note that President George H.W. Bush is the one who dubbed it “voodoo economics” and my friend Matt renamed it “trickle on economics.” Even so, you might be interested in this article by Bruce Bartlett, who helped shape and sell the Regan-era tax cut philosophy.
What I want to talk about is one very specific part of the proposed legislation that will affect everyone in United States, whether you own a home or not. One of the ways Congress wants to offset the tax cuts is to close loopholes. As a rule, “closing loopholes” means raising taxes on a few under special circumstances, but not in this case. In this case only a few people will not feel the effect of “closing loopholes” as an increase in their personal income tax or as price increases that will be passed along to renters.
State and Local Taxes
What “loophole” am I talking about? Both versions of the tax cut legislation include language that would do away with deductions for state and local taxes (SALT). Closing this loophole would affect anybody who either:
- Owes more than $10-thousand in property tax
- Pays state income tax
In one way, doing away with the deduction for more than $10-thousand dollars in property tax is the one part of this legislation I’ve seen that will actually benefit many middle class homeowners at the expense of other groups. But it’s probable that the loss of these deductions by landlords would simply be passed on to their tenants in true “trickle on” form.
Supply and Demand or Demand and Supply
What choice would the landlords have? Most single family rentals cash flow less than $500 per month. On some of the properties I own, the local property taxes are higher than my principal and interest costs. Or to put it personally, last year, I paid more than $50-thousand in property tax. I believe in paying those taxes. But if the SALT “loophole” goes away, I’ve got to get that money somewhere. Eliminating, or even sharply curtailing, the deductions for property taxes would leave people like me with only two untenable options:
- Raising rents to cover the loss where markets will bear it—hurting tenants who are already being priced out of the market in some areas
- Dumping my suddenly unprofitable houses on the market which would result in deflationary pressure on home prices—hurting homeowners, for many of whom their home is likely their largest investment
Then there’s the fairness factor. Removing or reducing the deduction for state and local taxes is essentially taxing individuals on the taxes they have already paid. This is essentially the argument many conservatives use against the estate tax. The difference is that the estate tax affects only a very small portion of the populace. Everyone pays state and local taxes.
So please contact your representatives in Washington. Whatever you position on “tax cuts” may be, let them know that eliminating the SALT deductions hurts everybody. I don’t believe the SALT deduction will be eliminated—at least, not for corporate landlords—but we can’t afford to base our future on wishful thinking. I mean, the House is even talking about eliminating the mortgage interest deduction.