The housing market on Long Island and in other suburbs with high taxes and home values will be hurt by the new tax law, which limits the deductibility of state and local taxes on federal income tax returns, New York’s most powerful banker warned Thursday.
William C. Dudley, president of the Federal Reserve Bank of New York, said, “The $10,000 cap on the amount of state and local income and property taxes that can be deducted will raise the effective cost of owning higher-end residential property in high-tax states. This could adversely affect the home prices and construction activity of high-end housing in such states.”
Dudley expressed his concern during a speech to a Wall Street trade group in lower Manhattan. He was generally downbeat on the law’s ability to increase U.S. economic growth.
Dudley told the Securities Industry and Financial Markets Association that U.S. corporations and wealthy individuals will benefit the most from the Tax Cuts and Jobs Act of 2017, adopted late last year. But he said both groups are unlikely to spend their windfall and thereby boost economic activity.
He estimated the tax changes will increase the U.S. gross domestic product, the value of all the goods and services produced in the country, by less than 1 percent this year and in 2019.
“Most of the tax cuts accrue to the corporate sector and to higher-income households that have a relatively low marginal propensity to consume,” Dudley said. “That suggests that a significant portion of the tax cuts will be saved, not spent.”
Moreover, the cut to the federal corporate tax rate, from 35 percent to 21 percent, is less dramatic than proponents have said because profits typically have been taxed at about 25 percent.
So the tax cut is “far smaller,” about 3 to 4 percentage points, he said.
Dudley also said he was pessimistic about how the U.S. economy will fare beyond this year because the tax law raises the budget deficit, which in turn dampens growth.
“The legislation will increase the nation’s longer-term fiscal burden, which is already facing other pressures, such as higher debt service costs and entitlement spending as the Baby Boom generation retires,” he told the audience of about 120 business people. “The current fiscal path is unsustainable.”
Dudley predicted U.S. GDP will rise 2.5 percent to 2.75 percent in 2018 because of robust consumer spending, low unemployment and a soaring stock market. This represents an increase from his earlier prediction.