• States with low tax burdens have seen an INCREASE in homebuilding activity on average by 16%. This includes states such as Florida, South Dakota, New Hampshire and Oklahoma.
• States with a high tax burden have seen a DECREASE in homebuilding activity on average by 1.3%. This includes states such as New York, California, New Jersey and Illinois.
• Overall US home building activity has increased by 4% since the law took effect.
As most of us know, the Tax Cuts and Jobs Act of 2017 limits federal deductions of state and local taxes to $10,000 annually for those that itemize deductions. At the time the bill was being debated, many political pundits predicted that the cap would cause taxpayers in in high tax states to relocate to low tax states. Yet since the change took effect, there has been little analysis of its precise impact or what impact, if any, the tax change has had on where taxpayers are choosing to live. We decided to take an in-depth look. Our approach was to compare homebuilding activity for some of the highest tax burden states with those of low tax burden states during the 18 months since the bill took effect. We measured permit activity for January 2018 through June 2019 and compared new home activity in the same states with the prior 18-month period (July 2016 – December 2017.)
It turns out that precise ranking of a state’s tax burden is not an exact science. Tax burden is typically defined as both the combination of (1) a state income tax rate and (2) the state property tax rate. As states and local municipalities have various ways to implement these – say a graduated income tax vs. a flat income tax – we took the average of three different independent ranking groups and composed our series of high and low tax states. Those included in the high tax burden states were New York, Connecticut, New Jersey, California and llinois.
Those included in states with low tax burdens were Oklahoma, Florida, New Hampshire, Delaware and South Dakota. We note that each group contains one state with a large amount of new home activity (Florida and California) while the other four members of each group had relatively modest new home permits. We note that results are not universal. Some low tax states saw declines in new home activity while high tax burdened California saw a 3% increase in permit activity. But when viewed as a group low tax states saw significant gains in activity while high tax states witnessed declines.
The summary results showed that the low tax burden states increased new home permits by 16.6% for the 18-month period ending June of 2019 vs. the prior 18-month period. Conversely, high tax burden states decreased residential permits by 1.3% during the same time period. While homebuilding groups including the National Association of Realtors (NAR) were universally against the tax reform bill, overall US new home activity has ticked up 4.0% of the 18 months since the legislation became law.
For more information on how tax reform has transformed homebuyer behavior or to receive the census data tables used in the findings, please call John Rymer at (404) 909-5799 or e-mail.