If you've been trying to come up with dollar estimates on how you'd fare under the tax-code revisions now pending on Capitol Hill, consider these conclusions from a provocative new study covering 184 American communities:
Owners of homes priced in the $50,000 to $200,000 range could lose 3 to 5 percent of the resale value of their properties from the termination of the federal deductibility of local property taxes.
The size of the loss caused by the nondeductibility of property taxes would vary according to local assessment practices and tax rates. The middle-income owner of a $100,000 condo in Boston, for instance, could expect a decline of $7,100 in capital value. The owner of a similarly appraised home in Minneapolis-St. Paul would experience a $5,100 to $5,400 drop. On high-tax Long Island, the losses would exceed $12,000 on a $100,000 house, whereas the losses would come to only several hundred dollars in the lowest-taxed counties of Alabama.
The financial impact of the proposed termination of local property-tax deductibility on homeowners -- particularly on middle-income and elderly owners whose net worths depend heavily on home-equity values -- would be far greater than many assume. For some families in communities that traditionally have levied high property taxes, the combined effect of lower real estate values and cuts in local services could be shattering.
Those are just some of the findings of research aimed at answering one key question for Congress' tax-policy debate: What happens when you take away the traditional deduction that households are permitted for taxes they pay to local governments? Thirty-three million American families take these deductions annually, 87 percent of whom have annual gross incomes under $50,000.
The research for the report was conducted for a collection of organizations that normally don't get involved in real estate issues: the National Council of Senior Citizens, the International Association of Firefighters, the American Association of State Colleges and Universities, the National Association of Public Hospitals and 30 other public, union and educational groups.
The study used federal census and other data to examine property tax practices in a wide range of cities and towns across the country. Researchers came up with "effective property tax rates" for nearly 200 communities by multiplying their published, statutory tax rates by the ratio of assessed valuations to actual property values. In doing so, the true tax rates could be put into nationally comparable terms, keyed to assessed values.
For example, using the latest federally published data, the effective local property tax rate in Baltimore was 1.97 percent, according to the study. That translates to an annual property tax bill of just under $2,000 on a $100,000 home.
Under current federal law, all $1,970 of the taxes paid by the owner of that Baltimore home would be deductible for federal income tax purposes. If the homeowner were in the 35 percent marginal tax bracket, he or she would get to write off $689 in federal taxes. If the owner were in the 50 percent bracket, the savings would be $985 per year.
But how important is that annual tax-deduction savings to homeowners in Baltimore and other large and small municipalities nationwide? What connection is there between savings such as these and the amount of money people can afford to pay for a home? And what connection is there between these savings and the resale value commanded by a house?
The connections are eye-opening, according to the study. Tax savings have been built into the value structure of American home real estate for years, said Thomas H. Stanton, the Washington lawyer who coordinated research for the study. Subtract those savings abruptly from the finances of a single-family home -- as President Reagan's tax-reform package would -- "and you inevitably are going to see values decline," in Stanton's view.
To come up with specific value-change estimates for the communities covered by the study, the researchers applied a "present-value" capitalization formula to the tax savings experienced by owners of hypothetical houses. In the case of the $100,000 Baltimore house, the elimination of the annual $1,970 federal tax deduction translated into a 5.7 percent loss ($5,741) in resale value. In other words, if Congress ended the deductibility of local property taxes, the Baltimore homeowner would see the resale value of his home slip by 5.7 percent.
In cities with lower effective tax rates, the market impacts on the same $100,000 house would be correspondingly less. Phoenix's effective rate of 0.62 percent, for instance, would hold the value loss on a $100,000 house to $1,808, according to the study. Owners in California, who enjoy relatively low effective property tax rates as the result of Proposition 13, would fare better than owners in the Northeast, Southeast and Midwest.
In general, the study found, the higher your local property taxes, the bigger the "hit" you'll take financially if Congress eliminates this deduction.
(For effective tax rate estimates and a "how-to-calculate-it" excerpt from the property value study, write to Matthew B. Coffey, National Coalition Against Double Taxation, 440 First St. NW, Washington, D.C. 20001.)