Why would the President and Republican leaders want to torpedo the prospects of the most important economic engines in the country—our gateway cities? But that's what their “tax reform” could do. And real estate owners and investors can only hope all the personal goodies they will be getting in pass-throughs, depreciation and various other writeoffs will offset the potential damage to the economies of the nation's most important urban centers.
Severely limiting state, local and property tax deductions in these higher cost places (New York, Washington DC, Chicago, San Francisco, Los Angeles, and Seattle among them) will increase, not decrease, tax payouts for many residents, crimp affordability further and pressure state and local governments into cutbacks they can ill afford. Raising already high taxes when they cannot be deducted on federal returns will be unpalatable for many local pols. Basic services—police, fire, sanitation—could be impacted. School districts will suffer and infrastructure spending may be curtailed just when the Congress will be pushing more spending burdens onto the states, given the deficits that the tax cuts will be ramping up at the federal level. Mass transit systems, key roadways, bridges and tunnels in these cities require major overhauls to keep commerce functioning—where is the money to come from?
Piling on with the $750,000 mortgage deduction ceiling is almost guaranteed to dampen the co-op and condo markets in these cities already flush with multi-million dollar apartments at a time when new projects are continuing to increase supply without sufficient demand. Luxury rental apartments are softening with further rental declines now seemingly baked in. Developers may be able to escape through various tax and legal stratagems, but what about their lenders?
And then add in the elimination of tax subsidies on commuter mass transit expenses and the prospect of even higher health insurance rates, because of the elimination of the Obamacare individual mandate. Any gains wage earners see from a modest increase in take-home pay, because of a slightly lower withholding, will be more than offset by these higher overall cost of living increases. That could mean significantly less disposable income to put into the local economies. And homeowners will likely see property values take a hit and along with it their net wealth. It all spells trouble for local retailers and service businesses, including contractors and homebuilders.
Planned reductions in federal public housing programs will hit directly at poor communities and create greater burdens on cities for dealing with the homeless and sick.
The result of all this could be the end of a 30-year period of urban renaissance that brought these cities out of a fiscal swamp and crime-ridden morass, and created over-the-top wealth for real estate developers, owners and investors.
Blue states and the dominant 24-hour cities have contributed more in taxes to the federal government than they get back in revenues. That's because they have been the centers of 21st Century industry and commerce—financial, high tech, entertainment, healthcare, culture, higher education, and tourism. Hobble them and the entire country suffers.
Coal mining, ranching, oil drilling, manufacturing, and farming—mostly heavily government subsidized, by the way—can't and won't remotely pick up the slack. The states where these industries concentrate will continue to take more in dollars from federal programs than they pay back in taxes.
The country cannot afford to let its major cities decline. Neither can the real estate industry.
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Jonathan D. Miller
A marketing communication strategist who turned to real estate analysis, Jonathan D. Miller is a foremost interpreter of 21st citistate futures – cities and suburbs alike – seen through the lens of lifestyles and market realities. For more than 20 years (1992-2013), Miller authored Emerging Trends in Real Estate, the leading commercial real estate industry outlook report, published annually by PricewaterhouseCoopers and the Urban Land Institute (ULI). He has lectures frequently on trends in real estate, including the future of America's major 24-hour urban centers and sprawling suburbs. He also has been author of ULI’s annual forecasts on infrastructure and its What’s Next? series of forecasts. On a weekly basis, he writes the Trendczar blog for GlobeStreet.com, the real estate news website. Outside his published forecasting work, Miller is a prominent communications/institutional investor-marketing strategist and partner in Miller Ryan LLC, helping corporate clients develop and execute branding and communications programs. He led the re-branding of GMAC Commercial Mortgage to Capmark Financial Group Inc. and he was part of the management team that helped build Equitable Real Estate Investment Management, Inc. (subsequently Lend Lease Real Estate Investments, Inc.) into the leading real estate advisor to pension funds and other real institutional investors. He joined the Equitable Life Assurance Society of the U.S. in 1981, moving to Equitable Real Estate in 1984 as head of Corporate/Marketing Communications. In the 1980's he managed relations for several of the country's most prominent real estate developments including New York's Trump Tower and the Equitable Center. Earlier in his career, Miller was a reporter for Gannett Newspapers. He is a member of the Citistates Group and a board member of NYC Outward Bound Schools and the Center for Employment Opportunities.
