Tinkering with tax law is a matter of picking winners and losers, usually done with as blunt instrument rather than a scalpel. A nip here, a tuck there, an amputation over there. Pull these levers, push those, and call it “reform.” It’s not. It’s just doing favors for some people at the expense of others.
The GOP tax bill released this week has its own way of picking winners (married couples who can leave more than $11 million to their heirs!) and losers (those who pay more than $10,000 in annual property taxes). Tax legislation, more than any issue, can leave voters scratching their heads. They are always trotted out with perfectly gerrymandered mythical families, designed to make the bill’s author’s look great and opponents look silly. Like this.
“A family of seven with a dog, cat, and three ignuanas would save $732 over a 43-year span under our bill!”
Of course, your perspective is likely based on how you would fare. There’s so many permutations to the GOP bill, I can’t really help you with that. You’ll have to do your own math. After the legislative sausage is made, the tax bill will look substantially different anyway, so don’t waste too much time on that.
It is helpful to peel back the layers of the proposal, however, and see what groups are targeted by it. To that end, ATTOM Data Solutions has provided me with an excellent data set around one of the legislation’s most controversial targets: Homeowners with mortgages over $500,000.
Depending on where you live, that group either sounds like fat cats or the impoverished middle class. That’s America. Yes, my Texas readers, there are plenty of places in America where you must borrow $500,000 in order to buy a home near half-decent schools. All those people would be hit by tax increase under this provision, as the mortgage interest deduction is a dollar-for-dollar reduction in taxable income.
Here’s my example: If you earn $97,000 and pay $27,000 in mortgage interest (roughly the first-year interest on a $600,000 mortgage), your taxable income is only $70,000 (Check my math). Under the GOP bill, only the interest on the first $500,000 would be deductible. That’s about $22,000, leaving taxable income of $75,000. Probably a $2,000-ish tax increase, depending on lots of other factors. And yes, I know someone making $97,000 probably shouldn’t be buying a $650,000-ish home. But…that’s America, in some places. (And I went for simpler math). Feel free to pick your own example.
By the way, this deduction cap already applied to million-dollar mortgages, so the GOP bill only impacts that slice of people with above-$500,000 mortgages but below $1 million mortgages. Again, in some places, that’s rich people. In some places, that’s solidly middle class.
Where are these people? You might be surprised. One out of 20 mortgages originated across the country would be impacted by this change, ATTOM says. In some places, far more. The winner is….
Washington D.C., and it’s not even close. There, more that one-third of 2017 mortgages required borrowing more than $500,000. A full 35.1%!
Maybe you hate people in D.C., so you figure that’s ok. But down the list, you might be surprised at who fits into the top 10. Not surprisingly, Hawaii and California sit at second and third on the list. But the top 10 us rounded out by:
|4. Delaware – 9.3%|
|5. Massachusetts – 9.1%|
|6. Washington – 9.1%|
|7. Louisiana – 8.9%|
|8. Maryland – 8.8%|
|9. Virginia – 7.9%|
|10. Iowa – 7.4%|
You might see a lot of Democratic-leaning states in that list, but Louisiana and Iowa are also in there (as is Virginia, increasingly a toss-up). New York, Nevada, New Jersey, Colorado, and Connecticut all sit above the 5% mark.
Things get even more interesting if you get a bit more micro. Here’s a list of the top 20 metro areas, ranked by percentage of homes closed in 2017 that had over-$500,000 mortgages:
|MSA||Pct of Loans Over $500K|
(District of Columbia)
|Washington-Arlington-Alexandria, DC-VA-MD-WV (Falls Church, Vir)||34.6%|
|New York-Newark-Jersey City, NY-NJ-PA (Kings County)||29.1%|
|San Jose-Sunnyvale-Santa Clara, CA||27.8%|
|San Francisco-Oakland-Hayward, CA||23.9%|
|New York-Newark-Jersey City, NY-NJ-PA (New York County)||23.4%|
|San Francisco-Oakland-Hayward, CA (Marin)||23.3%|
|San Francisco-Oakland-Hayward, CA (Alameda)||22.8%|
|San Francisco-Oakland-Hayward, CA (San Francisco)||22.4%|
(Montgomery Country, MD.)
|New York-Newark-Jersey City, NY-NJ-PA||21.2%|
|San Muguel, Colorado||21.1%|
(Loudon County, Vir.)
|Vineyard Haven, MA||20.4%|
Seems like it’s a bad time to be home buyer anywhere near Washington D.C., no? Remember, these people will face a tax increase based on the amount they must borrow to buy a home. If you pay cash, or have a substantial down payment on a very expensive house, there’s no increase.
It’s also worth noting that plenty of smaller, less government-y places also have plenty of “losers” in this tax proposal. A few examples from browsing the ATTOM data: 10,068 over $500k mortgages were taken out so far this year in the Phoenix area; 5,725 near Las Vegas; 3,387 near Houston; about 7,000 near Dallas; 1,930 near Charlotte; and 1,200 each in Baton Rouge, Cedar Rapids, Iowa, Portland Ore., and Memphis, Tenn. Every one of those buyers –if they bought after the GOP tax plan was enacted — would face a tax increase because of this mortgage interest tax deduction change.
In the winners and losers calculation, these are the losers.