In late 2017, Congress passed the Tax Cuts and Jobs Act (TCJA), the first significant overhaul of the federal tax code in 30 years. Among many other changes, the act affected the tax treatment of individual homeownership, primarily by putting limits on itemized deductions of state and local taxes (SALT). By capping the deductions at $10,000, the TCJA reduced the economic benefits of homeownership, particularly in counties with high taxes.
In "Real Estate Taxes and Home Value: Winners and Losers of TCJA," Wenli Li and Edison G. Yu conduct the first nationwide analysis of the act's effects on the U.S. housing market. Their study focuses on changes in home values, represented by changes in sale price, listing price per square foot, and the Zillow Home Value Index (an index published by Zillow Group, which maintains real estate databases and provides online services to buyers, sellers, and renters). They also used indices published by CoreLogic Solutions, a firm specializing in the aggregation and interpretation of real estate data, to track home values.
By using a national sample, the authors isolate the TCJA's influence on housing markets from other factors, such as movements in interest rates and fluctuations in local demand for housing. After accounting for changes in mortgage rates, Li and Yu find that the legislation had a meaningful effect on the tax benefits of homeownership.
They begin by defining "house sales" as sales of single-family, condominium, and cooperative properties. They exclude takeovers of foreclosed properties, title transfers (after a divorce, for instance), and transactions between affiliated parties (business partners, friends, and the like).
Their sales data cover the period from January 2015 to October 2019, across a baseline sample of 3,079 counties. The volume of house transactions within the sample fluctuates across counties, with an average of 240 and a median of 57. The average real estate tax burden (real estate taxes expressed as a fraction of household income) ranges from 0.76 percent to almost 5 percent. As expected, counties with higher tax burdens are concentrated on the East Coast and the West Coast, along with a few areas in central Texas and northeastern Illinois.
The authors find that local house prices were affected by the TCJA, particularly by its limits on the deductibility of local and real estate taxes. They show that after January 2018 (when the act became effective), home values grew more slowly in high-tax-burden counties than in low-tax-burden counties. Before January 2018, no such trend was evident.
Among their additional observations, the authors report three notable changes that happened after the TCJA took effect.
First, in counties with an above-median real estate tax burden, house prices grew at a rate 3.5 percentage points below that of counties with a below-median tax burden.
Second, in counties with a high real estate tax burden, the housing market experienced bigger price cuts, declining sales volume, and a lower sale-to-list-price ratio relative to counties with a low tax burden.
And third, listings in high-tax-burden counties took longer to sell, on average, than properties in low-tax-burden counties. This slowdown in velocity, also referred to as liquidity deterioration, was even stronger in high-income counties. This lower liquidity was an additional source of pressure on home prices in high-tax-burden counties.
By analyzing the home construction sector, Li and Yu also explore how the TCJA affected local economies. They report that counties with a higher real estate tax burden saw slower growth in construction-sector jobs than areas with a lower tax burden. In fact, the higher the tax burden, the more harmful the effect on jobs.
Local economies appeared to be affected in other ways as well, including a change in the number of people who moved out of high-tax-burden counties. The paper reveals that on a net basis, the TCJA motivated residents to relocate to lower-tax-burden counties. This migration was more common among homeowners who held mortgages.
Li and Yu also look at the act's possible effects on voting behavior. Using data for the 2018 U.S. Senate midterm elections, they find a larger voting share for Democrats in high-tax-burden counties (based on a sample group of 806 counties). The results are the same even when holding constant the Democratic voting share in the 2016 U.S. Senate elections.
In "Real Estate Taxes and Home Value: Winners and Losers of TCJA," Li and Yu find that the TCJA appears to have affected high-tax-burden counties more than it affected low-tax-burden counties. After the act became effective, home values in high-tax counties experienced slower growth, liquidity levels decreased, housing construction slowed, and a measurable number of residents moved to counties that imposed lower taxes. In other words, the TCJA adversely affected high-tax counties and benefited low-tax counties. Li and Yu point out that these results are important, not least because housing often plays a prominent role in Americans' financial lives, accounting for a substantial part of their total wealth.