Ryan tax proposal could hurt his constituents in upscale enclave

House Speaker Paul Ryan’s efforts to kill a deduction as part of a Republican tax overhaul would hit very close to home—among his constituents with homes on glistening Geneva Lake in his southeastern Wisconsin district.

On the shores of the 5,400-acre lake, once a hideout for Chicago mobster George “Bugs” Moran, multimillion-dollar homes have replaced many of the quaint cottages that once dotted the area. Annual property tax bills on waterfront properties along North Lake Shore Drive range from about $21,000 to $71,000, local real estate records show. For most homeowners in the heavily Republican area, however, those costs are eased by their ability to write off state and local taxes on federal returns.

Eliminating that deduction, a proposal backed by Ryan and at least initially by President Donald Trump, has been sold in part as a way to shift more taxes onto high-income, high-tax states like California, New York and New Jersey, all of which lean Democratic. But enclaves of upper-middle income homeowners like Geneva Lake are the Achilles heel of the GOP tax plan, said Moody’s Analytics Chief Economist Mark Zandi. While low-income and high-income households are likely to get a tax break from the GOP plan, upper-middle-income professionals could come out as losers, he said.

 House Speaker Paul Ryan, a Republican from Wisconsin, speaks during a news conference on a unified tax reform framework at the U.S. Capitol in Washington.
U.S. House Speaker Paul Ryan, a Republican from Wisconsin, speaks during a news conference on a unified tax reform framework at the U.S. Capitol in Washington, D.C., U.S. Photographer: Andrew Harrer/Bloomberg

For Ryan, who carried surrounding Walworth County in 2016 with 69 percent of the vote and has represented the district since 1998, the push to eliminate the deduction is already testing longstanding friendships.

“Overall, I support him and what he does,” said Steve Beers, chairman of a local real estate company. “But this is one thing that I don’t.”

Internal Revenue Service data in Wisconsin’s 1st Congressional District shows the importance of the state and local tax deduction to many residents there. Among the roughly 1,000 returns filed in the 53125 ZIP code in 2016, the average state and local deduction was $10,909, well more than double the national average of $3,691.

Republicans are considering compromises, including one that would allow individuals to continue to deduct property taxes, while eliminating a larger tax break for their other state and local taxes. Roughly two dozen Republican House members from high-tax areas have raised concerns about elimination of the tax break.

“The focus of the unified tax plan is tax relief for lower- and middle-income families in Wisconsin and across the country,” said Ian Martorana, a Ryan spokesman. “The lower tax rates for those individuals and families, doubling the standard deduction, and an increase in the child tax credit will ensure that relief and allow people to keep more of the money they’ve earned.”

Abolishing deductions for state and local taxes, including property taxes, would raise an estimated $1.3 trillion over 10 years—an amount Republicans could use to offset the deep tax-rate cuts they’ve proposed. Retaining the ability to deduct property taxes would cost an estimated $300 billion. The Trump administration, which proposed eliminating the so-called SALT deduction in April, has indicated willingness to compromise on the issue.

Wisconsin is known for high local and state taxes, said Beers, a Republican who met with Ryan earlier this year about real estate tax topics.

Home Ownership

“It creates an unfair playing field,” said the real estate executive who personally pays about $32,000 a year in property taxes for his lakefront home. “I think it affects how people will look at home ownership.”

Beers stopped short when asked whether he would withhold electoral or financial support for Ryan, if the speaker succeeds in eliminating the deduction. “I want to see how this all plays out and how he listens to what we have to say,” he said.

House Republicans say their goal is to release a tax bill on Nov. 1—if they keep on track with a key preliminary vote this week. Toby Steivang, a Ryan donor and a retired banker whose five-acre hilltop property overlooks Geneva Lake, is eager to see the bill’s details.

“We need tax reform,” said Steivang, who pays about $13,000 in taxes for his Geneva Lake property. “But it’s give and take. Somebody is going to get hurt and somebody isn’t.”

Moody’s Analytics’ economic models say that home prices in Wisconsin’s Walworth County would fall about 5 percent over the next few years, all else being equal, if the Republican plan is implemented. That’s higher than the 4 percent drop they projected for the country as a whole. The biggest home price declines would come in New York and the surrounding suburbs.

Obvious Losers

Moody’s projects that the GOP plan would lead to a maximum price decline of 15.1 percent in Essex and Union Counties in New Jersey. New York County prices would decline 14 percent, while Nassau County prices would fall about 13.7 percent, from peak to trough, the company said.

“There are some obvious losers here,” Zandi said. “Really big ones.”

Taxpayers have a choice when it comes to tax deductions: They can either itemize them by compiling their actual expenses for state and local taxes, charitable gifts, home-mortgage interest and certain other items—or take a lump-sum “standard deduction,” that’s the same for all. (This year, it’s set at $12,700 for married couples filing jointly.)

Realtors say getting rid of the state and local deduction would make the standard deduction more attractive, especially because Trump and congressional Republicans propose increasing it to as much as $24,000 per married couple. As a consequence, the mortgage-interest deduction would lose some of its appeal, damping demand for homes, they argue.

“They will immediately begin to feel the financial pain of not being able to deduct,” said Lawrence Yun, chief economist of the National Association of Realtors. “I think people will make that calculation in terms of how much to bid for a home.”

Bottom Line

Representative Peter Roskam, an Illinois Republican who presides over the Tax Policy Subcommittee, said conversations he’s had with his constituents suggest they are more interested in the overall package than any single deduction.

“What they are looking at is what’s the bottom line for them,” said Roskam, whose constituents stand to lose about $3.4 billion worth of federal tax deductions annually if the state and local write-off is eliminated.

Roskam said he’s encouraging people to look at the full package, once more details are available next month, and “allow us to craft a soft landing” for those who have large state and local deductions.

“This is an ongoing discussion with members such as myself from high-tax states,” he said. “Tax reform cannot simply be the redistribution of a tax liability from one part of the country to another part of the country.”

Some conservative economists who support the tax plan say the realtors’ actual concern is their own income.

“The one, common denominator with the realtors is that anything that increases prices, they’re in favor of,” said Ed Pinto, co-director of the International Center on Housing Risk at the American Enterprise Institute. Pinto said property tax deductions often just get factored into higher prices, rather than saving homeowners money.

Marty Hogan, a small-business owner who has a home on Geneva Lake, said he’s more interested in overall rates and taxing business income than the state and local deduction.

“Smart people will find a way to get around it,” he said before playing a morning round of golf at the Big Foot Country Club. “That’s what we hire people for.”

Bloomberg News
Tax reform State taxes Tax deductions Tax breaks Tax cuts Paul Ryan Moody's Analytics
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