An Expensive Win

By amending the tax code, President Trump almost certainly cost me a mid-sized fortune. I admire him for it.

Four and a half years ago, I wrote a long post on the horror show that is our tax code. In it, I made the following observation:

“Three gigantic ‘sacred cow’ federal deductions that particularly need to be reconsidered are: state and local taxes, interest on home mortgages and charitable gifts. In a sense, all three represent subsidies for high-income people (often resident in high-tax states) at the expense of people in lower tax states. If you live in a high-tax northeastern state, as I do, your proportional benefit from these deductions is much greater than if you live in a low-tax state such as Texas or Florida – so you will pay a lower federal tax bill than another person with the same income who lives in a low-tax state. Why should Texans or Floridians subsidize local taxes in New York that support local spending in New York from which they do not benefit? Why should they get stuck with a higher percentage of the federal bill?”

Perhaps the President, or Secretary Mnuchin, is a secret reader of Civil Horizon.

In sharply limiting deductions for state and local taxes and mortgage interest, the newly amended code will cause the well-off to pay more in taxes – in cases like mine, much more – be fairer to people who live in low-tax states and effectively force the six deep-blue, highest-tax states (California, New York, New Jersey, Connecticut, Illinois and Massachusetts) to reconsider their tax-and-spend ways – or see the high-income taxpayers on whom they depend for wildly disproportionate shares of their tax revenues decamp for more welcoming climes.

The New York Times would have us believe that the tax cuts are a giveaway to the rich, but the real reason that it and leading blue-state Democrats are apoplectic about the bill is that it will hurt their real constituency – the wealthy, uber-progressive coastal elites. (If you are ever confused about to whom the Times speaks, consider the incomes needed to buy the kinds of goods advertised on its pages).

Though I don’t share the worldview of most of the Times’s readership, I do share their zip codes and tax brackets, so I will be hurt, too. As a resident of New York State with a second home in Connecticut, I will lose the benefit of federal deductions for my state income taxes paid and for the property taxes on both houses.

The absence of these deductions, which for me had totaled … let’s just say really a lot, means that my federal tax bill will rise by quite considerably more than the slightly lower nominal rate will save me. But that’s just the beginning of the pain that the new tax bill will almost certainly cause me because I also have to expect that that the loss of most federal tax deductibility for property taxes will result in dramatically lower real estate values on high-value properties, so when I go to sell my homes I’ll get much less than I otherwise would have. Buyers will have to take into account the higher net carrying costs, of course, and these changes in the code may well accelerate the departures of wealthy taxpayers to low-tax states, all of which means that there’ll be fewer, stingier buyers and the financial conditions of the heavily indebted blue states (like New York and Connecticut) will only worsen until their policies change.

Oh, boo hoo, you might say; you’re probably sitting on big price gains. But I am not. Even though I bought my primary residence more than twenty years ago, and my second home ten years ago, I’m pretty sure that on an aggregate basis I was already under water on these homes – looked at as investments – before the new tax code provisions even begin to be priced into the market. The declines in real estate values in the Connecticut River Valley flowing from the departures of Connecticut’s most important private sector employers already overshadowed whatever inflation-based gains were embedded in my primary residence.

No, the losses in high-value* blue-state real estate that I expect to flow from the changes in the tax code are all-too real and, unless I am quite mistaken, effectively permanent. I do not expect that the coastal states will ever have enough strength in Congress to again reward their richest taxpayers with such one-sided federal deductions.

And, oh by the way, my situation is more common than not among well-to-do coastal types. The loss of these deductions will result in both increased carrying costs (via higher federal taxes) and lower net equity-in-our-homes (via declines in high-end real estate prices) for pretty much all of the well-to-do coastal people I know – and I know a lot of them. Markets are pretty rational things.

So what am I, some kind of a masochist? How could I believe all that about the pain that these changes will cause my neighbors and me and yet support them?

As indicated by my four-and-a-half-year-old post, I think that our tax code was both severely inefficient and fundamentally unfair. These changes make it less so. Further, I believe that the dramatically lower corporate tax rate will significantly improve the nation’s business climate, to the benefit of all. Indeed, I am convinced that the roughly 33% rise in the stock market since President Trump’s election reflects the market’s correct judgement that a lower corporate rate would be put into effect (as well as that regulatory burdens would be lessened, as they have been).

So I can see the stock market’s gains as offsets to some of my likely eventual real estate losses, and I hold fast to the view that a better business climate and a fairer tax code will eventually benefit us all.


M.H. Johnston

* Note that the tax code changes were carefully designed to have little effect on middle class real estate costs and (thereby) values – the new $10,000 limitation on such deductions should not hurt most taxpayers. This post focuses on the likely effect of these changes on well-to-do taxpayers and expensive real estate, particularly in high-tax in blue states.

4 comments to An Expensive Win

  • Bill  says:

    Even after SALT deductions, those “Blue States” you point toward are each donor states – contributing more to Federal Tax Revenue than they receive back in aid, grants and contracts. That’s because our income tax is progressive and these states are high income. They’re high income because they also happen to be more productive on a per capita basis than most. And because they pay out more than they get back – they help out poorer states, allowing them to keep their taxes lower.

    Those high-incomes also bid up prices. Hence the cost of living is higher. This means that hiring state and local employees is also more expensive – so is funding their pension and retirement plans which are based on the employee’s income level – funds that frequently disappear to the lower cost sun-belt areas when the employee retires. Regardless, that’s why the taxes are so high. Try hiring teachers in New York on a Florida wage.

    Lastly – by making a primary claim on those tax dollars, isn’t the government making a primary claim on state and local responsibilities? This also weakens state and local government’s ability to raise taxes and/or funding. Frankly – I’d like CT and IL to manage their own unfunded pension liabilities and not ask D.C. to bail them out. But I happen to be a fan of Federalism and don’t care to have D.C. managing my DMV or hiring our teachers.


  • Ron Cypers  says:

    Well done Mark. Agree with your projection that the tax code revision will have a meaningful negative effect on NY metro area home values. And yes the wealth effect of a strong stock market helps to offset the coming pain.

  • Lewis  says:

    Well done, Sir.

  • Aaron Trehub  says:

    I hope you’re right about the nation’s business climate. As for your own situation, you might consider moving south. I can vouch for Alabama. Taxes and the cost of living are both low(er), the winters are mild by New England standards, the people are civil and friendly, the food is great and so is the music, the business climate is extremely healthy, the public infrastructure is in surprisingly good shape, there’s great kayaking on the Coosa River and in the estuaries around Mobile, and you get a free box of ammo with your driver’s license (I kid!). Also, the politics are interesting. A little too interesting of late, in fact. We could use some fresh perspectives, especially conservative ones. Give it some thought.

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