High-tax states could face credit risk from eliminating local and state tax deductions, says S&P Global Ratings

One of the early concerns around the GOP’s tax reform bill was the elimination of state and local tax deductions. That point has re-emerged as S&P Global Ratings came out this week saying that the Congressional tax reform could hit home prices in high-tax states, and potentially have a “credit impact from both the tax base reductions and resulting lower tax revenues,” especially in locales where property taxes are an important part of the local government’s revenues.

The House version that was approved on Thursday limits property tax deductions to $10,000; the Senate version could eliminate it altogether. Both versions would eliminate state income tax deductions.

High-tax states like California and New York would be affected the most, and California will particularly be hit by the proposed elimination of mortgage deductions over $500,000, since it has seven of the 10 cities that will be most affected by the elimination.

The municipal bond markets have not reflected these sentiments, but have been seeing the effects of other aspects of the reform proposal. In particular, there are concerns around the possible elimination of tax exemptions for private activity bonds and advanced refundings, which could cause a reduction in issuances of the new tax-free muni bond.

+++ + +++