The recent federal tax legislation will have an adverse credit effect on local governments in the tri-state region of Connecticut, New York and New Jersey, according to a recent report from Moody’s.
This is due to the region’s relatively high state and local taxes and unusually high home prices, particularly in the New York City metropolitan area. The impact, however, will vary from state to state depending on tax levy formulas, fixed cost burdens and state actions to blunt the effect of the federal changes.
“The SALT deduction and mortgage interest deduction essentially lower the cost of owning a high-priced home in a high-tax area, thereby incentivizing homeownership in these areas,” Valentina Gomez, assistant vice president at Moody’s and lead author of the report, said in a statement. “Reduction of these deductions diminishes the incentive for homeownership and will slow home value appreciation.”
Other highlights from the report include:
- Growth in property tax revenues will be pressured. The limit on the state and local tax deduction and a lower cap on the mortgage interest deduction will likely dampen housing price growth in the tri-state region and other states with a high percentage of individuals claiming the deductions. Slower growth will curb assessed value growth and resulting property tax revenues, depending on how taxes are structured and a municipality’s capacity to raise them.
- Local governments with high fixed costs will face more difficulty than usual in managing revenue challenges. If revenue growth stalls or declines, local governments with high fixed cost burdens will have more trouble reducing expenses because they have less discretionary spending to cut. In addition, the tax legislation’s elimination of advanced refundings reduces local governments’ ability to take advantage of low interest rates.
- Changes at the state level could mitigate impact. New York’s fiscal 2019 budget, for example, provides for contributions to state-run charitable funds for education and health care, allowing some taxpayers to partially offset the impact of the SALT deduction change. Further, the legislation allows businesses to opt for a payroll tax as an alternative to employees paying individual income tax. The IRS, however, might challenge these tactics or others aimed at easing pain from the tax law.
