The Republican tax reform plan may have passed through the House on Thursday, but a certain demographic has emerged within the GOP that isn't pleased.

Representatives from states with high property taxes, such New York Republicans Lee Zeldin, Peter King, and Dan Donovan, are up in arms about new lower caps on the mortgage interest and property tax deductions.

As I detailed in an earlier post, the tax reform plan calls for a reduction in the amount of interest on a mortgage that is deductible. The old cap allowed for a married couple to deduct the interest for a mortgage up to $1 million, and the new plan would cut that amount to mortgages up to $500,000. In addition, property tax deductions would be capped at $10,000 a year. Combine that with the complete elimination of the deductions for state and local income tax, and that's a serious issue for these congressmen and their constituents.

"Let's stop pretending this tax proposal is good for everybody," Donovan wrote in the New York Daily News. "The middle-income people of New York, California, Illinois, and New Jersey are footing the bill for a tax break for people elsewhere."

Those four states, which all went blue in the 2016 presidential election, still have a foothold of fiscally conservative bases in affluent areas, like constituents in Manhattan suburbs--such as Long Island and Westchester--and affluent areas in California, like Orange County. The majority of the homeowners in these locales pay higher income taxes than the rest of the country, and they now think that with these cuts in deductions, they'll be feeling even more of a squeeze.

I recently had a chance to speak to Lisa Sicurelli, chief executive officer at Ambassador Abstract, a Long Island, New York-based title company, and a member of the National Association of Realtors. She told me that that the caps are going to have a major impact on a large swath of her customers.

"These caps may not sound like a big deal, but in New York on Long Island, the median annual property tax bill in Nassau County is $9,667, and $8,151 in Suffolk County. That means just under half of residents of Long Island--which has about 8 million residents--have taxes higher than $10,000 and would be affected by a lower cap," she explains.

Why does it matter? Sure, some home buyers may be willing to pay $500,000 for a home, or one that has property taxes higher than $10,000, whether or not they are incentivized from a tax perspective to do so. But for many families, the previous tax deductions meant the difference between being able to afford a new home and not being able to afford it.  Once you lose those people, your demand goes down, and with it, the number of qualified buyers at a certain price point.

Sicurelli says that if that happens, it creates a glass ceiling on home prices.

"The largest investment in most Americans' portfolio is real estate, and that's really what we're dealing with here. If a cap on mortgage interest and/or property taxes becomes a factor in a homebuyer's decision, it could suppress property values," she explains. "What kind of impact will that have on the ability of a retiree, who is planning to sell their home at a certain value to boost his nest egg? Or a growing family who has outgrown their starter home and needs to get a certain price to move up to a larger one? It has an impact on a home owner's equity."

As the Senate looks to pass its own bill as soon as the week after Thanksgiving, it creates an interesting internal struggle for a certain number of these states' senators. Do they heed the warning of some of their Congressional colleagues, or do they forge ahead anyway, despite their objections? Sicurelli thinks they should tread carefully.

"I think we learned 10 years ago what happens when we play dangerous games with the housing market: Things don't end well," Sicurelli says. "The market is going through a great recovery period right now. Demand is high. Nationwide prices were up over 5 percent in Q3. And I worry that anything that could deter consumer sentiment might put a damper on this period of growth."

Based on the fact that this reform is on the fast track to the president's desk, the debate on this issue may be all but closed. Time will tell what kind of implications that will have.

Published on: Nov 20, 2017