Part II–The Senate bill
Since our first post on the potential impact of proposed tax bills on real estate investors working the middle of the housing market in Texas and Colorado, Congress has taken further action. Most importantly, the Senate republicans have proposed their own bill. The House Ways and Means Committee also passed a revised version of the House bill, meaning it now goes for consideration by the full House. The provisions in the House bill analyzed in our post earlier this week have not changed. Accordingly, this post focuses on the Senate bill.
Differences from the House bill
The Senate bill differs from the House bill in two respects relating to our analysis. First, the Senate Bill would not lower the $1 million cap on mortgage-interest deductibility. To review, the House bill lowers that cap to $500,000. As discussed in the original post, the House provision would not likely affect the middle of the market. It follows that the Senate bill would not affect the middle market by keeping the limit where it is.
The second relevant difference in the Senate bill is another matter. The Senate would completely end the deductibility of property taxes, as well as all other state and local taxes. As discussed in the original post, the House would preserve the deductibility of up to $10,000 in property taxes.
Likely Impact
The Senate approach to the property-tax deduction would further reduce tax incentives for middle-market home buyers. As noted in our post on the House bill, the doubled standard-deduction amounts present in both bills would reduce itemization among middle-income home buyers. The Senate approach would intensify the reduction in itemization. With no more deduction for property taxes, even fewer middle-income home buyers would have itemized deductions exceeding the newly doubled standard-deduction amounts.
As discussed in our prior post, even the House approach would likely leave very few middle-income homeowners who would itemize. Educated estimates put the percentage in the single digits. The Senate approach would likely reduce that percentage even further. And for any remaining middle-income home owners who would still have incentive to itemize, the Senate bill would cut the value of their deductions.
The factors discussed in the previous post under “How much does it matter?” apply to the Senate bill and the elimination of the property-tax deduction just as they did to the changes in the House bill. Despite those factors, however, we concluded that the House bill would put some downward pressure on market prices if it passed as proposed. Applying the same reasoning, we conclude that the Senate bill would put more downward pressure on the middle market than the House bill. Accordingly, the Senate bill is as written has relatively more potential to negatively impact real estate investors than the House bill.
A word about broader economic effects
Anyone following the debate over these bills will hear claims and counterclaims about broader economic effects the bills may have. Supporters of the bills will claim that they will lift the general economy. The positive overall economic impacts will offset the loss of any particular benefit or deduction, supporters claim. Opponents of the bills will argue that they will not have the positive economic effects supporters claim. Some opponents also believe the bills will have negative economic effects that will offset any positive effects. For instance, the bills would very likely increase national deficit and debt levels, which could crowd credit markets and raise interest rates.
Predicting future trends, causes and effects in the broader economy is notoriously fraught with peril. It is also beyond the scope of this post. So we are not attempting to resolve conflicting predictions about the broader economic consequences of the bills. That’s why we have focused only on the proposed changes to provisions that directly affect incentives in the middle of the housing market.