How Does the $10,000 Cap on State and Local Taxes Impact the Housing Market in New Jersey?
Purpose: The Tax Cuts and Jobs Act caps deductions on federal individual income tax returns for State and Local Taxes (SALT) at $10,000 became effect January 1, 2018. It is unclear how this cap impacts high property states like New Jersey, which has one of the highest property tax rates of in the country and a good number of homeowners who were impacted by this cap. At 2.42 percent, New Jersey has the highest effective average property tax rate and more than double the national average of 1.07 percent. New Jersey currently has the highest property taxes in both absolute numbers and as a percentage of home value. The average 2020 home value in New Jersey was $408,517, and the average property tax bill was $9,112, which is almost three times the national average property tax of $3,300. Collectively, New Jersey has close to 2,500,000 single family homes that generate total property taxes of over $27 billion a year. Design/Methodology/Approach: To better understand the relationship between house prices, property taxes, personal income and high school rankings, we collect data from various sources (NJ.com, the Division of Taxation, the St. Louis Federal Reserve Bank, and NJ Monthly) and use an ordinary least squares equation to estimate the impact that property taxes, income, and the quality of public high schools have on the average house prices across the different municipalities of New Jersey. Findings: We find that municipalities with high property taxes also, on average, have high housing prices. Results show that house prices increase by close to $50,000 dollars for every $1,000 increase in the average property bill. Similarly, as expected, high average income of individuals is associated with higher housing prices. Finally, homeowners are apparently willing to pay higher prices to live in an area that has high-quality school as evidenced by our estimation results: We find that moving up ten spots in the high school rankings is associated with an increase in the average tax bill of approximately $1,940. Practical implications: Collectively, this suggests that high taxes are not the reason for high housing prices, but rather something that homebuyers are willing to accept in exchange for services such as quality public schools.