New Tax Plan Looms Like a 'Dagger' Over New York City, Critics Say
A prospective client abruptly ended her hunt to buy a three-bedroom apartment on Manhattan's Upper East Side last week, said broker Donna Olshan.
The reason: uncertainty over how the latest Republican tax plan would hit her family.
Like many New Yorkers, the client was bracing for a blow, under the latest tax bill under consideration in Washington. "The bill is an absolute dagger in the heart of the real-estate industry in New York," said Ms. Olshan, a broker who issues a weekly report on high-end sales in the city.
House and Senate Republicans agreed on a framework this week for a tax bill that cuts corporate taxes and lowers rates for the wealthy. But it also reduces breaks that many in the New York region heavily lean on, such as the deductibility of mortgage interest and state and local tax deductions.
The final bill, expected to be voted on early next week, will allow a deduction of up to $10,000 in state and local taxes, an amount that can include property taxes as well as income taxes or sales taxes.
In Manhattan, deductions for state and local property taxes averaged more than $57,400 while deductions for property taxes alone averaged $14,400, according to Internal Revenue Service data from 2015.
Nearly one-third of New York City taxpayers and nearly half of all taxpayers in suburban Long Island and Westchester claim itemized deductions for state and local taxes, according to the Empire Center, a nonpartisan, nonprofit think tank based in Albany.
Limiting those state and local tax deductions, home prices in Manhattan could fall as much as 9.5%, according to an analysis by Moody's Corp.
"New York's economy is a loser under the plan," said Mark Zandi, chief economist for Moody's Analytics. He added that local governments, unable to raise taxes, might be forced to cut back on services.
Already the specter of change has caused a slowdown in Manhattan sales in the past few months, said Hall F. Willkie, co-president of New York-based brokerage Brown Harris Steven.
New York business leaders expect few to uproot their families just because of the tax overhaul. But banks and other companies seeking to shift jobs to low-cost areas could reconsider the city. Younger workers may think more about rival areas for a better quality of life such as Austin, Texas; Seattle or Pittsburgh.
"The problem is the relative attractiveness of New York," says Hamilton "Tony" James, Blackstone Group LP's president and chief operating officer. "Our relative labor costs are rising at a time other cities around the country have become more attractive to young people and others."
Kathryn Wylde, chief executive officer of the Partnership for New York City, a business organization that works with government, labor and the civic sector, says the prospective changes likely will cost New Yorkers as much as $30 billion a year in additional tax payments.
"This is a substantial tax increase for the middle class and high earners who are salaried workers," she says. She estimates that top earners in the city could pay as much as 57% of their income in taxes, up from 52%.
"The flow of global talent will be affected," she adds. "There's sticker shock coming from just about any place in the world."
Some aspects of the tax bill could be less devastating for the city. The wealthiest would see their top marginal tax rates fall to 37% from 39.6% while the corporate tax rate is expected to be cut to 21% from 35%, aiding local businesses.
The mayor's office argues that the overall job situation could be limited if companies take advantage of lower tax rates by investing in their business.
Some wealthy New Yorkers who already have second homes in Florida or other states may be tempted to shift their residences to those low-tax locales, some analysts say. But the New York area will likely maintain its sway over others.
On Wednesday, as the Senate and House worked on completing the deal, a group of a dozen or so wealthy New Yorkers met for lunch, part of a monthly meeting to discuss investments and other issues related to their so-called family offices.
When a member asked how many of the attendees would "finally leave New York" because of the tax bill, no one raised a hand, says Howard Gurvitch, a New York investor at the meeting.
Mr. Gurvitch notes that some in the room likely will remain subject to alternative minimum tax provisions that have kept them from benefiting from state and local tax deductions on their federal returns or are in the real-estate business and can take advantage of other tax breaks, so the proposed changes won't have a big impact on them.
"I could move my company to Florida but there's not enough reason to do that," says Richard Leibovitch, managing partner of Arel Capital, a real estate-investment firm based in New York City. "Most people are unlikely to move unless they're already on the fence about it."
Write to Gregory Zuckerman at gregory.zuckerman@wsj.com and Josh Barbanel at josh.barbanel@wsj.com
(END) Dow Jones Newswires
December 15, 2017 16:20 ET (21:20 GMT)