| Changes to the SALT deduction, while it will complicate the tax filings of thousands of Massachusetts residents, won’t do anything to slow the state’s runaway housing prices.
The U.S. tax code is purposefully complicated. One silver lining of its contortions is the number of people employed to unwind it – if the law was easy to understand, what use is there for CPAs, tax advisors, attorneys and software companies?
New changes enacted by Congress to the tax law, despite purportedly “simplifying” the process, have required those tax professionals to work overtime to explain what they will mean to the common taxpayer.
The answer, of course, is that it’s complicated. Some people will see immediate savings that will dissipate over time; others won’t benefit at all. The Banker & Tradesman staff is primarily interested in the write-downs banks are taking this year and how these changes will impact the mortgage industry.
Various media outlets have sought to connect tax law changes to the housing market in ways good and bad. It’s true the interest deduction has decreased, but it is unlikely to adversely affect the financial fortunes of a homeowner with a $1 million mortgage.
As we all know, Massachusetts has relatively high taxes, but how changes to the state and local tax (SALT) deduction will impact each current and prospective homeowner depends on a wide variety of variables.
Each municipality has and sets its own tax rate annually; a home assessed at $500,000 in Longmeadow, where the residential tax rate for fiscal year 2018 is $24.34 – currently the highest in the state – will have a very different tax bill than one in Chilmark, where the residential tax rate is $2.14.
Property taxes, income levels, the complication of living in New Hampshire or Rhode Island and working in Massachusetts – all of these change each person’s SALT deduction. But whatever those impacts may be, they won’t adversely affect the housing market.
People buy houses for a long list of very personal reasons. First-time buyers are, for the most part, more concerned with what their monthly payments will be than with the tax implications of being a homeowner. Those on their second or third home purchase are looking at time to payoff and whether they’ll be making mortgage payments in retirement. And those are just the financial implications of buying a house – location, school systems, commute time, even the number of bathrooms are higher on the list of home qualifications than are local tax rates.
There are only two paths to a balanced market. First is a huge supply increase, which isn’t likely since the state has a finite number of housing units and isn’t producing more at anything approaching a rate that would mitigate the demand. And second, if demand drops – and drops a lot. The kind of event that would cause demand to drop enough to bring down home prices is not an event we want to experience. A few examples: world-wide recession; a stock market crash; rising sea levels engulfing the city of Boston.
Relatively minor changes to the nation’s tax law are not going to slow this juggernaut.
