The largest federal tax overhaul in 30 years is expected to have a modest impact on the Houston economy and real estate market as it delivers deep tax cuts to companies, puts more money into the pockets of many families, and limits mortgage and property tax deductions.
The tax bill’s centerpiece – slashing corporate taxes to 21 percent from 35 percent – is likely to deliver some boost to Houston, which has the nation’s second-highest concentration of Fortune 500 companies.
But how big a lift the local economy gets, analysts said, will depend on how companies spend that extra money – whether they invest it in new projects and hiring, or merely distribute it to shareholders and buy back stock to increase share prices.
And ultimately, the tax changes won’t be as important to the Houston economy as the direction of oil prices.
“If oil prices stay high, that’ll be good for Houston,” said Jesse Thompson, an economist with the Houston branch of the Federal Reserve Bank of Dallas. “But tax policy is too much of a mixed bag to say what the net effect of that is going to be.”
Congress gave final approval to the tax overhaul on Wednesday, and President Donald Trump is expected to sign the bill into law. While Trump and congressional Republicans have portrayed the tax cuts as supercharging the U.S. economy, most analysts expect a much smaller effect, in part because the nation is already at full employment and the Federal Reserve is raising interest rates to keep the economy from overheating.
In Houston, still recovering from a brutal oil bust, the take on the tax cuts from most analysts is they couldn’t hurt. With crude prices on the rise – they closed above $58 a barrel in New York Wednesday – and energy companies increasing spending on drilling, some of the windfall from the tax cuts could go into new projects, analysts said.
In addition, three out of four Texans are expected to get tax cuts. In Houston, where incomes plateaued in the wake of the oil bust, the tax savings could provide a boost to consumer spending, said Patrick Jankowski, an economist with the Greater Houston Partnership.
“It’ll have a greater impact on the economy,” he said.
Got to www.Chron.com for a look at how tax overhaul might affect sectors in the Houston economy.
Energy companies are among the big winners in the tax overhaul. The industry managed to protect its tax breaks, while also benefitting from the cut in corporate tax rates.
In addition, the tax bill opened Alaska’s Arctic National Wildlife Refuge to drilling. Under the legislation, the U.S. government will begin leasing a 1.5 million acre section of the reserve as early as 2022. In the meantime, companies are likely to watch oil prices to see if they will rise high enough to create profits in a difficult and costly environment.
Texas tax impact
The Tax Cuts & Jobs Act could be a boon for about three-fourths of Texans – 9.2 million – who itemize their taxes. This group stands to benefit the most from the tax bill’s doubling of the standard deduction, which will now be $12,000 for individuals and $24,000 for couples.
Another 2.8 million people in Texas itemize some combination of local sales, property or income tax deduction, as well as interest payments they make on their home mortgages. About half of these people – including more than 200,000 in Harris County alone – make more than $100,000 a year. Given new limits, more of these taxpayers will likely move to the standard deduction.
More than 2.3 million Texans – 380,000 in Harris County – who write off their property taxes partially dodged a bullet in the final version of the Tax Cuts & Jobs Act. Originally eliminated in the Senate version of the bill, the state and local tax deduction remains, including for property and sales taxes, though capped at $10,000.
Another near miss for some 2 million Texas homeowners who deduct their mortgage interest. Originally set to be capped at $500,000, the limit was raised to $750,000 in the final version of the bill, at least on new loans. But that’s down from the current $1 million threshold.
On the other end of the income spectrum, more than 1 million Texans stand to lose their medical coverage in 2025 due to the repeal of the individual mandate to buy insurance under Obamacare, which is likely to raise premiums.
— Kevin Diaz
“They’re all going to ask themselves the questions internally,” Luke Johnson, a lobbyist with Brownstein Hyatt Farber Schreck, said. “It’s a little while until we see their cards.”
The industry also beat back provisions that would have hurt profits. For example, Rep. Kevin Brady, R-Woodlands, chairman of the House Ways and Means Committee, had proposed raising costs on imported goods, something that would have hit the Texas refining sector, which imports much of its crude. It was ultimately dropped after widespread opposition.
“We’re glad Congress and the administration listened. It’s a great bill for the U.S. refining and petrochemical industry,” said Chet Thompson, president of the American Fuel and Petrochemical Manufacturers.
Renewable energy companies also succeeded in saving tax credits for a few more years. Those credits have helped make wind and solar energy competitive with traditional power sources, such as coal and nuclear, and fueled the rapid growth of renewables in recent years. Texas is the nation’s leader in wind power.
Renewable tax credits are scheduled to phase out after 2020, but ending them sooner would have caused great harm to the industry, said Steve DeWolf, founder of Dallas-based Wind Tex Energy. By saving the credits, DeWolf said, “wind farm development is going to continue at a frantic pace. There’s a huge boom in Texas.”
Under the tax changes, home-owners will be able to deduct interest on the first $750,000 of their mortgage debt, down from $1 million. That will affect only a small slice of homeowners: About 2.5 percent of homes sold in Texas are priced over $750,000, according to the Texas A&M Real Estate Center.
“Most people are not getting a jumbo loan for $800,000,” said Lawrence Dean with Metrostudy, a housing consulting firm. “It’s a fairly narrow pool of people impacted.”
Still, Patrick O’Connor, a Houston-based property tax consultant, said prices in the luxury market could slide by 5 to 10 percent as a result of the smaller mortgage interest deduction. A homeowner with a home assessed at $1 million is expected to pay $3,700 more in federal taxes next year, he said.
“It makes a difference,” O’Connor said.
The bigger impact in Houston would be the $10,000 cap on property tax deductions, said Jim Gaines, an economist with the Texas A&M real estate center.
Texas, which has no state income tax, has some of the highest property taxes in the nation. As many as a quarter of houses in Houston could have property taxes above the $10,000 threshold, Gaines said.
“Quite frankly, that will be the biggest impact that affects Texas,” he said.
Small businesses also get tax cuts, but how much will depend on how they are incorporated. Most small businesses are set up as so-called pass-through entities in that the profits that accrue to the owner are taxed at individual rates. Under the tax bill, these type of small business will get a 20 percent tax break.
Thomas Nguyen, co-owner of Peli Peli Restaurant Group, said he expects the tax break to reduce the company’s overall tax burden, though he hasn’t determined exactly how much he’ll save. At this point, he’s most interested in how the tax cuts might affect consumer confidence and restaurant spending, which slumped in the wake of Hurricane Harvey.
“I’m hoping that will put a lot more money in the pockets of our potential customers,” he said.
John Leggett, president of Houston-based On Point Custom Homes, said he plans to reinvest their tax savings into the company. He is rolling out a matching 401(k) plan for his 14 employees next year. He also is looking to hire three additional workers in 2018.
“Since I get to keep more money, it’s a good opportunity to invest back into the company and grow,” Leggett said. “We think that will pay dividends back to us.”
Even with tax break, “pass-through” businesses are likely to pay higher rates than those with a corporate structure. Janice Jucker, co-owner of Three Brothers Bakery, said she and her husband are thinking about reincorporating the company to take advantage of the lower corporate rates enacted in the bill.
She spent part of the day on the phone with her accountant, trying to determine whether that move would result in savings. The couple has plans to add locations, which would require them to report more personal income tax if they kept the business as-is.
“We’ve been pondering what are we going to do,” she said.
The tax bill also includes a windfall for brewers, vintners and distillers, which would have their excise tax bills cut significantly for at least two years. The impact could be particularly significant in Texas, which hosts about 200 craft breweries.