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By: Mark Glennon*

On two key points, it doesn’t matter whether the bottom line on homeowners’ federal tax bill would go up or down under tax law changes Washington is considering.

Under both the House and Senate proposals now pending from Republican Congressional majorities, Illinois home values would drop and anger over high property tax rates would intensify. Huge, unintended consequences of doubling the standard deduction are being overlooked.

In other words, set aside other important issues like who would benefit most from the tax cuts, effects on growth and whether tax breaks for home ownership ever made sense to begin with. Let’s look at just two issues for now — effects on home prices and the property tax problem because, as you’ll see, they are largely independent from the other issues.

Home ownership is subsidized and prices propped up in many ways, but the two biggest are tax deductions for mortgage interest and property taxes. Both would disappear for the vast majority of Illinois homeowners, regardless of whether they get an overall tax cut:

Mortgage Interest Deduction

The Senate proposal would leave the mortgage interest deduction fully intact. The competing House proposal would limit the deduction to interest on mortgages up to $500,000. (Currently, that cap is $1 million.)

“No effect,” you might therefore conclude, if the Senate prevails or even if the House prevails on most homes because most mortgages are under the cap.

Wrong.

That’s because both the House and Senate proposals would roughly double the standard deduction for a married couple to $24,000, making the mortgage interest deduction irrelevant to most Illinois homeowners. For all but a few, in other words, the mortgage interest deduction would no longer be an incentive to buy a home.

A study this month by a Zillow economist has the data. The number of itemizers would drop dramatically under either the Senate or House bills.

For example, about 51 percent of homes in Cook County are worth enough under current law for mortgage interest to be sufficient for a homeowner to take the mortgage interest deduction instead of the standard deduction. Under the House bill, just 11 percent of homes in Cook Country would itemize instead of taking the standard deduction. Under the Senate bill, only 4 percent would.

It’s a similar story for all counties surrounding Chicago, though some counties already have virtually no itemizers. Here are the data on other Illinois counties:

zillow-data.png

Property Tax Deduction

Illinois has the highest property taxes in the nation, with effective rates over 3%, 4% and even 5% in many communities — several times the national average. That burden is currently softened by deductibility of property taxes for federal income tax purposes. Most married homeowners have marginal tax rates ranging from 15% to 33%, which means their true property tax burden is reduced by that percentage if they are itemizing (and most are now itemizing in Cook and surrounding counties, as shown in the data above).

But the Senate bill would entirely eliminate that deduction and the House bill would limit the amount to $10,000.

The impact might be particularly harsh on pricey homes. Let’s say a married couple makes $120,000 each, which puts them in the 35% federal tax bracket. They own a home worth $800,000. A property tax rate of 2.5% or $20,000 per year would be common in many Chicago suburbs. Under the Senate bill their effective, after-tax property tax bill would increase from $12,000 to $19,000 per year, or $583 per month. (I am including the 5% tax credit on Illinois income taxes that presumably will stay in place.)

Even under the House proposal, their annual, after-tax property tax bill would increase by $3,500 or about $290 per month.

They won’t be happy. They’re likely already fuming about their property tax bill.

For the majority, who aren’t in homes that expensive, the property tax deduction would become irrelevant because they wouldn’t be itemizing, as shown in that Zillow data. So, again, they may get their federal tax bill lowered but the property tax deduction will have disappeared as a tranquilizer for high property tax rates.

Consequences

Decide what you want about the two pending proposals overall, and keep in mind there are many other issues pertinent to it and to the nation’s overall policy on housing. Both proposals may indeed cut federal taxes for most Americans, as proponents claim. That would partially offset the negative effect on home prices because people would simply have more money, some of which would probably go into homes. It’s clear, however, that both proposals would end or drastically reduce two tax policies that now prop up home prices.

Many may see that as a good result. They may also see this it as a welcome, last straw in our Illinois’ property tax mess that will finally induce comprehensive reform of some kind. If that doesn’t happen, however, more communities will approach death spiral property tax rates that we’ve written about before since both proposals will lower property values and increase effective, after-tax property tax rates. Once rates pass three or four percent new construction and property, improvements become irrational and the incentive to reduce assessed values increases. That drives values down, feeding the cycle further.

Realtors are livid about both proposals, as you’d expect. The National Association of Realtors says we should expect a 10% drop in home prices nationally if they become law.

For Illinois, I’d say that’s optimistic.

*Mark Glennon is founder and Executive Editor of Wirepoints. Opinions expressed are his own.

 

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21 Comments on "Pending Federal Tax Changes Would Lower Illinois Home Values And Deepen Property Tax Rage – Wirepoints Original"

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Steve-Oh

Mark: If the federal income tax is reduced under the House or Senate bill, for a homeowner in ILL, then it could be argued that the home value should not decrease due to the tax law change. Even tho the reduction in federal inc tax would be smaller than for someone with lower state income and prop taxes. It’s just that the federal income tax calculation will be different, and the tax reduction would have been more if ILL didn’t have such large state income tax and homeowner prop tax. Doesn’t that sound reasonable ?

I own my home and 1 of my daughters isn’t a deduction anymore. My real-estate taxes are insane beyond 10K by a few but with a 24K standard deduction I’m not sure it’s not a wash or something close to that. We shouldn’t screw the nation over screwed up Illinois it’s time for everyone blind to the Democrat screwing in Illinois to wake up. If they want to modify the Illinois Constitution to get their “progressive screw everyone tax” they also need to remove the inability to adjust pensions back into reality… Frankly it should be unconstitutional to have a public union, without real representation on both… Read more »
Stv-Oh

D: You got THAT right !

Rick

Is a reduction in home values a bad thing for the market and construction and urban renewal? Lower prices mean lower property taxes, and more potential buyers qualifying for a home. Flushing a market with mortgage tax deductions as an incentive has only given Illinois the justification to tax more. Let’s stop conflagating home ownership with your income taxes and let the real estate market progress undistorted. I’m all for raising the standard deduction and umping AMT in trade for my property tax deduction.

Stv-Oh

Yeah, it’d be pretty darn bad for homeowners, to say the least !

Bob Out of here
Tax rates don’t go down, if the property value drops by half, the multiplier goes up. This is from the 2015 Chicago CAFR. “The County Clerk computes the annual tax rate by dividing the levy by the Tax Base and then computes the rate for each parcel of real property by aggregating the tax rates of all governmental units having jurisdiction over that particular parcel. The County Treasurer then issues the tax bills.” If you look at historical data for tax levies, even during and after the housing crash they never levied less-they never cut their budget. “More, more, more” is the government mentality, and the numbers… Read more »
Erik
With the exception of Champaign County new construction is already dead and buried in downstate Illinois. I was in the construction trades and operated a very successful excavation and concrete construction business in a 6 county territory in Central Illinois. We suffered an 80% market contraction immediately after the great recession and never recovered from it. Last year a grand total of 156 new homes were built in McLean County (a county with nearly 180,000 residents!). Peoria county is in even worse shape. Excessive regulation in the form of annual adoption of expensive new building codes is also a driver of the death of new construction. These… Read more »
Bull

I live in Peoria County. Do you know how many homes are under construction in Peoria County? Not sure but I do agree with on the new building codes acting as hindrance of construction.

On another note Peoria County voters approved a County Sales Facility Tax a year ago. The school district I lived in promised immediate property tax relief if this was passed. Now they are kicking the can to 2019.

Jeff+Carter
I am a big fan of not being able to deduct state and local taxes on federal income tax forms even though in the short run it will probably hurt me. Why should a low tax state like South Carolina subsidize a high tax state like Illinois? Essentially the subsidy is a transfer of wealth from low tax states to high tax states. For a state like Illinois it’s just a talking point. We all know that bankruptcy is the only option left on the table. Changing the tax code will hasten bankruptcy forcing lawmakers to own up to their malfeasance, and that’s a good thing.
Mike

States are NOT allowed to go bankrupt under the federal bankruptcy law.Join the discussion

Mike

Is Bankruptcy for States Illinois’ Answer? A Primer.
Wirepoints Original
March 22, 2017
http://www.wirepoints.com/is-bankruptcy-for-states-illinois-answer-a-primer-wirepoints-original

Mr. Common Sense

States will only be able to file bankruptcy when congress passes legislation, so…START LOBBYING YOUR FEDERAL REPS NOW!…Save Illinois!

Doug

Jeff, I agree anything to force bankruptcy faster is better for all, the longer they delay the less pensioners and creditors will get.

Andrew+Szakmary

I agree with you on the effects that this “cartoonishly evil” tax bill, as the New York Times recently characterized it in an editorial, will have on housing prices in Illinois and everywhere else in the country, should it ultimately pass. But I suspect that if it does so it will be without a single Democratic vote in either chamber of Congress. So should the value of your house decline by 10% as a result, this time around, I hope y’all don’t blame Madigan, the unions, greedy pensioners, etc. for all of your troubles.

Steve-Oh

AS: Never believe the NYTimes tho. Occasionally they may get something right by accident, but they don’t “analyze”…..they knee-jerk react against Repubs and all ideas of Repubs to help the economy and taxpayers. There are several reasons neither the House nor Senate proposals are, or would be “cartoonishly evil”. If federal taxes are reduced for someone, then the person has more after-tax spending money, despite still having the same high prop tax and state tax. Period.

Harlon Katz

Madigan and the Democrats are the major reason our taxes are as high as they are. All the change in the federal taxes would do is expose those of us in Illinois to the full impact for their malfeasance. Up until this point, the blow was softened.

Also, I think the thing about the GOP bill is that it does have the “unintended” consequences of affecting Democratic leaning states more, which tend to have higher taxes, by forcing them to feel the full impact of their state and local taxes. That is not necessarily a bad thing.

Even though Madigan gave us the high property taxes? Ridiculous. Madigan is a property tax lawyer whose specialty is upping tax rates. Madigan + Teachers Unions = the problem. Congress is trying to fix.

Margaret

We’re screwed.

NB-Chicago

Mark-another great article, concise and to the point. thank you.