For New York Commuter Hubs, Tax Plan Threatens Trickle-Down Pain

(Bloomberg) -- In New York City's pricey suburbs, it's not just residents who will be squeezed by higher tax bills because of the Republican overhaul racing through Congress. Their towns may feel it, too.

The proposed rollbacks to deductions for state and local taxes, property taxes and mortgage interest may make it harder for residents of commuter hubs in New York, New Jersey and Connecticut to sell homes and lead more to challenge their real-estate tax assessments, potentially weakening local governments' biggest source of revenue, according to S&P Global Ratings. And political opposition to tax increases may rise, since those liabilities could no longer be used to drive down what's owed to the federal government.

“A drop in assessed valuations could really put pressure on municipalities," said Andrew Clinton, founder of Stamford, Connecticut-based Clinton Investment Management, which oversees $430 million of municipal bonds for wealthy investors. “We have a number of clients who have larger homes that have been on the market for some time” and the tax changes could make it even harder to sell luxury properties.

Both the House and Senate have voted to repeal the deduction for state and local income taxes to help offset the cost of lowering corporate taxes. The Senate would also repeal the deduction for property taxes, while the House's legislation would cap it at $10,000.

Those aspects of the legislation may be altered as House and Senate negotiators iron out the differences between the two bills. House Ways and Means Committee Chairman Kevin Brady said Wednesday that Republican lawmakers are discussing a compromise that would allow taxpayers to deduct state income tax.

If not changed, the provisions would fall heavily upon Democratic strongholds on the nation's coasts. New York Governor Andrew Cuomo accused Republicans of engaging in "political retaliation through the tax code." Twelve of the 13 House Republicans who bucked their party by voting against the legislation are from California, New Jersey and New York.

New York City's tri-state area accounts for 12 of the 25 counties with the highest average property- and mortgage-tax deductions, according to S&P. Manhattan ranks second, after Marin County, California, with an average deduction of $26,977. New York's Westchester County was third at $26,796.

The wealth has, however, left New York City's suburban governments with healthy reserves and generally high credit ratings. Half of the 130 communities S&P rates in northern New Jersey, Long Island and the New York's Hudson Valley are rated AAA or AA+, the two-highest grades. About 10 percent are rated A or lower.

In the near term, local governments may spend reserves to cover any lost revenue. In the longer run, they may have to raise property taxes -- a step that is already unpopular -- or cut spending on schools, roads and employees.

“I think you will have a community that's already loath to pay more taxes being very upset about the idea," Clinton said.

To contact the reporter on this story: Martin Z. Braun in New York at mbraun6@bloomberg.net.

To contact the editors responsible for this story: Christopher Maloney at cmaloney16@bloomberg.net, William Selway

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