By: Mark Sprague, State Director of Information Capital
The last time the U.S. underwent major tax reform was in 1986, and unintended consequences caused the 1987 “Texas Depression.” Two of the biggest Texas banks closed their doors, the Savings and Loan industry crashed, Texas real estate plummeted to 10 cents on the dollar, and the price of West Texas Intermediate (WTI) crude oil went from $85 a barrel to $10 a barrel. It took 15—19 years for the state to recover.
One of the looming concerns about the 2017 tax reform was how the major changes would affect states with higher costs (real estate, taxes, etc.), specifically 1) the amount of mortgage debt eligible for interest payment deductions was lowered, 2) a $10,000 cap was placed on state and local tax deductions, and 3) the overall marginal tax rate was lowered.
A few economists writing for the Liberty Street Economics blog at the Federal Reserve of New York have analyzed the current overall effect on 2018 home sales. While certainly not conclusive, the evidence presented in their analysis supports the view that changes in federal tax laws enacted in December of 2017 have contributed to the slowing of housing market activity that occurred over the course of 2018. You can read the full analysis and conclusions with tables and charts on the Liberty Street blog. By no means is 12 month analysis conclusive, but it’s interesting reading to say the least.
What does that mean to you and me? Though we’ve seen a slowdown in the housing market, on the whole, Texas does not seem to bear the brunt of “unintended consequences” of this tax reform, due to our lack of state income tax, business-friendly laws and policies, and relatively affordable housing compared to many other areas. Those states with high property values and income taxes seem to be bearing the brunt with corporate relocation to other states, loss of GDP growth, and more importantly – consumers moving to Texas due to lower costs.