WASHINGTON – Counties in the Chicago, Minneapolis and Portland metropolitan areas are among the places adversely impacted by the new cap on the federal deduction for state and local taxes, according to an analysis by S&P Global Ratings.
Sixty percent of the 117 counties identified in the report are located in 20 states outside of New York, New Jersey and California where the $10,000 cap has raised the strongest political objections.
The counties were identified using U.S. Census data on high state and local taxes in combination with a high percentage of households who itemize on their tax returns.
Five counties in Kentucky – Boone, Campbell, Fayette, Oldham and Woodford – are included on the list. Wisconsin also has five at-risk counties while Oregon has six and Iowa has two.
States with one county at risk stretch from Maine (Cumberland) and New Hampshire (Rockingham) in the Northeast, to Colorado (Pitkin), Utah (Summit) and Idaho (Blaine) in the West.
Jane Ridley, senior director in the U.S. public finance government group at S&P Global Ratings who serves as a sector lead for local governments and was lead author of the new report, emphasized that there is no immediate threat to governmental credit ratings.
“We are concerned about the long run,” Ridley told participants at the Government Finance Officers Association annual meeting in St. Louis on Tuesday. “We are concerned about what might happen to a lot of different places, but nothing that right now is necessarily pressuring credit quality where we see any kind of ratings changes.”
The cap on the SALT deduction could inhibit the ability of a local government to raise taxes and could lower the sales prices of homes in certain areas.
Ridley said the 117 counties will be monitored to see what happens in the real estate market and what the response is by local government.
“If we don’t see a pro-active approach to manage this, that could have an impact on credit ratings,” she said.
The cap on the SALT deduction sunsets at the end of 2025, which may affect how communities respond.
The report also identified large areas of coastal California, Washington D.C., and greater New York City, which includes parts of Connecticut and northern New Jersey, as having concentrations of counties that are adversely impacted.
S&P said the noteworthy places that didn’t make the list included Los Angeles County, the entire state of Washington and every county in Massachusetts outside of Nantucket.
The report also identified a larger area of low-tax jurisdictions where residents are expected to benefit from the federal tax cut enacted in December.
“The larger groups of low-tax counties that we identify are also familiar: large swaths of the South, the Mountain West, Missouri and Oklahoma,” the report said. “For the most part, in these areas we would expect to see general positive impacts for local economies following a tax cut, but nothing that would create a significant shift in credit quality yet.”