State Of New York et al v. Mnuchin et al

Filing 1

COMPLAINT against David J Kautter, Steven T. Mnuchin, United States Department of Treasury, United States Internal Revenue Service, United States Of America. (Filing Fee $ 400.00, Receipt Number 0208-15330056)Document filed by State of Maryland, State Of Connecticut, State Of New York, State of New Jersey. (Attachments: #1 Exhibit 1, #2 Exhibit 2, #3 Exhibit 3, #4 Exhibit 4, #5 Exhibit 5)(Olsen, Caroline)

EXHIBIT 1

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
__________________________________________
STATE OF NEW YORK,
STATE OF CONNECTICUT,
STATE OF MARYLAND, and STATE OF
NEW JERSEY,
Plaintiffs,
v.
STEVEN MNUCHIN, in his official capacity
as Secretary of the United States Department
of Treasury; the UNITED STATES
DEPARTMENT OF TREASURY; DAVID J.
KAUTTER, in his official capacity as Acting
Commissioner of the United States Internal
Revenue Service; the UNITED STATES
INTERNAL REVENUE SERVICE; and the
UNITED STATES OF AMERICA,
Defendants.

DECLARATION OF LYNN HOLAND

LYNN HOLAND, declares under penalty of perjury pursuant to 28 U.S.C. § 1746, that
the following is true and correct:
I.

Education and Background
1. I am the Director for Economic Studies of the New York State Division of the Budget
(“DOB”). I was appointed to this position in March 2014.
2. In the above capacity, my primary responsibility is overseeing the work of the economic
side of the Division’s Economic and Revenue Unit, which includes economic forecasting
for both the revenue and spending sides of the New York State Executive Budget; quarterly
Financial Plan updates; construction of computer simulation models for forecasting and
policy analysis in the areas of taxes, economic development, and health care; fiscal impact
1

analysis of proposed and enacted legislation; conducting research identifying economic,
demographic, and revenue trends that may have an impact on the State's long-term fiscal
condition; and budget negotiation with legislative fiscal committee staffs.
3. I previously served as Assistant Unit Chief, Principal Fiscal Policy Analyst, and Associate
Fiscal Policy Analyst within the Economic and Revenue Unit at DOB, and as a Principal
Economist with the New York State Assembly Committee on Ways and Means.
4. I hold a Bachelor’s Degree in Economics from the University at Albany and was a Ph.D.
candidate (“all but dissertation”) at the University at Albany.
5. In December 2017, the federal government enacted a new cap on the federal deductibility
of state and local taxes (“SALT Deduction Cap”) in Public Law No. 115-97 (“2017 Tax
Act”), § 11042. When used herein, the term “SALT” refers to state and local income,
property, and sales taxes.
6. This Affidavit details some of the likely consequences of the SALT Deduction Cap for the
State of New York, including with respect to the projected decline in real estate values in
New York.
7. In summary, I find that the SALT Deduction Cap will likely cause a decline in New York’s
real estate market as homeowners find it relatively more expensive to own a home in New
York due to the increase in federal taxation, resulting in up to $63.1 billion in lost equity
for New York homeowners. This decline in home equity could result in a corresponding
decrease in economic activity in the State of between $1.26 billion - $3.15 billion, and
result in the State losing between 12,500 - 31,300 jobs.
8. I have substantial experience with economic modeling and New York State budget
estimates, and believe the following statements are true and accurate to the best of my
knowledge.

2

II.

Projected Decline in Real Estate Values in New York and Corresponding Effects
9. The 2017 Tax Act contains numerous provisions that could adversely impact residential
real estate prices in New York State.
10. In December 2017, Moody’s Analytics presented an analysis of the 2017 Tax Act, called
“Assessing the Trump Tax Bill,” and it published estimates by county of the percentage
change in house prices due to the 2017 Tax Act compared with a baseline scenario that
assumes no change in tax law.
11. Moody’s Analytics identifies five primary ways through which the 2017 Tax Act is likely
to reduce New York State home prices. Those mechanisms include the SALT Deduction
Cap; the lowering of the maximum qualifying loan amount for the mortgage interest
deduction; the doubling of the size of the standard deduction; the projected increase in
interest rates that could potentially result from the 2017 Tax Act; and the likely migration
of residents to States with relatively lower tax rates.
12. Table E1, attached as Exhibit A to this Affidavit, presents Moody’s Analytics’ estimates
of the decline in New York home prices, by county, as a result of the passage of the 2017
Tax Act.1 Utilizing data from Moody’s Analytics and data on New York homeownership
and home prices, we estimate that the 2017 Tax Act could result in a statewide loss of home
equity totaling $100.8 billion (in 2016 dollars).2
13. Based on Internal Revenue Service (“IRS”) Statistics of Income data for the 2015 tax year,
the most recent year available, approximately 3.3 million New York State taxpayers
itemized their deductions on their federal tax returns. The average federal SALT deduction

The Moody’s Analytics analysis is based on the Federal Housing Finance Agency Home Price
Index (HPI), which measures average price changes in repeat sales or refinancing on the same properties
and, as such, represents a broad measure of the movement of single-family house prices. The Moody’s
Analytics HPI models account for the impact of the 2017 Tax Act through the construction of a
comprehensive after-tax cost of homeownership that includes the mortgage rate after adjusting for inflation,
the number of itemizers, the mortgage interest deduction, and the property tax deduction. See Chris Lafakis
et al., Economic Consequences Republican Tax Legislation, Moody’s Analytics (2017), at
https://www.moodysanalytics.com/webinars-on-demand/2017/economic-consequences-of-republican-taxlegislation (last visited Apr. 3, 2018).
1

The home price series used for this analysis was the Corelogic Inc.’s average single-family
home price series by county, obtained via Moody’s Analytics..
2

3

for that year for those taxpayers was $21,943. Among the 1.9 million State resident
taxpayers that itemized on their New York State tax returns, the majority reported SALT
deductions that exceeded the new $10,000 cap. The mean such deduction was $25,092,
while the median deduction was $12,522. Indeed, about 724,000 State homeowners pay
local property taxes alone in excess of $10,000. Historically, these tax burdens have been
one of the reasons why the federal deductibility of state and local taxes has been critical to
New Yorkers.
14. Of the various factors identified by Moody’s Analytics, the SALT Deduction Cap is likely
the most important factor that will cause residential real estate prices to decline in New
York State. While New York homeowners have previously been able to fully deduct the
cost of the property taxes assessed on their homes, the SALT Deduction Cap severely
restricts such deductions and thus increases the federal tax burden on New York
homeowners.
15. The total cost of owning a home in New York to an individual is comprised of a number
of factors including, but not limited to, the cost of the home, the interest rate on any
potential mortgage, local property taxes, and the ability to deduct local property taxes from
any federal and state income taxes owed. By removing a long-standing deduction relied
upon by millions of New Yorkers, the SALT Deduction Cap is likely to increase the total
cost of owning a home in New York. In other words, it will be more expensive to own a
home in the State (when taxes are considered). This increase in the cost of owning a home,
in turn, would be expected to depress home values in New York as buyers account for the
2017 Tax Act’s constraints on full SALT deductibility in their real estate market valuations
and bid prices.
16. To isolate the adverse impact of the SALT Deduction Cap, we constructed an estimation
model to quantify the effect of various county characteristics on the direction of county
home prices, as projected by Moody’s Analytics.3 Regression analysis was used to

These characteristics include the county’s average residential property tax bill; average county
household income multiplied by the top marginal state personal income tax rate for the state in which the
county is located; average county income multiplied by the highest top marginal local personal income tax
rate assessed by a municipality within the county; the number of owner-occupied housing units with a
mortgage in the county; the county percentage of itemizers based on 2015 IRS Statistics of Income data;
3

4

estimate the size of the impact of each of these characteristics. The estimation results
indicate that the total value of home equity potentially lost due to the SALT Deduction Cap
alone could be as high as $63.1 billion (See Table E1).
17. There are several corresponding economic results of this loss in home equity. Although a
loss in home equity value is not realized until homeowners sell their homes, homeowners
are likely to feel less wealthy even in the short term as they observe homes in their
neighborhoods losing market value based on actual sales. This, in turn, is likely to impede
their spending capacity through the wealth effect. The wealth effect is a commonlyaccepted economic principle that the value of an asset to an individual, such as a financial
security or a home, is evaluated through the prism of the value of a future income stream
from that asset. Thus, consumers perceive the rise and fall of the value of an asset as a
corresponding increase or decline in income, causing them to alter their spending practices.
18. In this instance, the decline in real estate prices would make New Yorkers feel less secure
about their financial position, and, in turn, would be expected to result in less spending and
economic activity. Less spending could, in turn, result in lower sales tax collections for the
State.
19. The loss of wealth associated with the decline in home prices is expected to have a
statistically significant impact on household spending in the State through the wealth effect.
Since there is a range of estimates for the magnitude of the wealth effect, we use two
alternative values to obtain a low-range estimate and a high-range estimate of the impact
of the loss of home equity on the State economy. To construct a low-range estimate, we
use a value of 2% derived from the Budget Division’s U.S. macroeconomic model,

the county unemployment rate for 2017; and a dummy variable equal to one if county i is located in state j
and zero otherwise. Each of these respective factors is hypothesized to have an independent effect on home
prices. Those factors that are related to state and local taxes are hypothesized to capture the impact of the
SALT Deduction Cap, which effectively increases the state and local tax burden. Isolating the impact of
those factors on Moody’s Analytics’ home price decline estimates allows us to, in turn, estimate how much
of those declines are related to the SALT Deduction Cap alone.
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DOB/US.4 To obtain a high-end estimate, we use a value of 5%.5 These two estimates
suggest that, because of the decline in home equity due to the SALT Deduction Cap, we
can expect an annual reduction in household spending in New York State between $1.26
billion and $3.15 billion.
20. Reductions in household spending by New York residents will also result in lower sales
for the State’s businesses, which, in turn, is likely to cause further reductions in economic
activity and employment.6 Under the low-range estimate of the impact of the wealth effect
discussed supra, we estimate that the potential reduction in economic activity could result
in the loss of approximately 12,500 jobs. Utilizing the high-range estimate relating to the
impact of the wealth effect, the State could lose approximately 31,300 jobs as a result of
the decline in home equity associated with the imposition of the SALT Deduction Cap.
21. Moreover, falling home prices could result in homeowners delaying the sale of their homes.
The combined impact of lower home prices and fewer sales transactions could result in
lower real estate transfer tax collections. DOB estimates that home price declines of the
magnitude estimated above could result in a decline in real estate transfer tax collections
of $24.5 million for FY 2019, with $15.3 million attributable to the SALT Deduction Cap.
This estimate climbs to $110.4 million for FY 2020, with $69.2 million attributable to the
SALT Deduction Cap alone.

4

For a description of the role of the wealth effect in forecasting household spending within
DOB/US, please see https://www.budget.ny.gov/pubs/supporting/MethodologyBook.pdf, p 24-25.
See Calomiris, Charles W. & Longhofer, Stanley D. & Miles, William, 2013. “The Housing
Wealth Effect: The Crucial Roles of Demographics, Wealth Distribution and Wealth Shares,” Critical
Finance Review, vol. 2(1), pp. 49-99, July.
5

6

To estimate the total size of the ultimate impact, we use the input-output model developed by
Economic Modeling Specialists International (“EMSI”).
6

EXHIBIT A

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Table E1: Estimated Impact of the 2017 Tax Act on New York State Home Prices
Total Impact

County

Average Single
Family Home
Prices*

Albany

$207,132

71,279

-4.3%

($630.6)

-2.3%

$61,269

13,334

-2.3%

($18.8)

-1.4%

($11.6)

$379,278

93,569

-2.1%

($733.2)

-1.1%

($391.3)

Broome

$97,581

51,475

-3.2%

($161.3)

-1.8%

($91.2)

Cattaraugus

$85,448

22,606

-2.2%

($43.2)

-1.4%

($26.5)

$112,929

21,993

-3.3%

($83.0)

-1.9%

($48.4)

$98,729

36,888

-2.0%

($71.3)

-1.2%

($42.7)

$107,025

23,815

-2.5%

($62.8)

-1.4%

($35.0)

$81,090

14,968

-2.2%

($26.5)

-1.4%

($16.4)

Clinton

$121,186

21,598

-3.7%

($95.7)

-2.0%

($53.1)

Columbia

$236,260

18,331

-2.7%

($115.8)

-1.6%

($70.0)

Cortland

$101,971

11,511

-3.7%

($43.9)

-2.2%

($26.3)

Delaware

$123,759

13,787

-1.9%

($32.8)

-1.1%

($19.4)

Dutchess

$255,845

73,505

-6.2%

($1,173.0)

-3.6%

($680.9)

Erie

$147,657

249,815

-3.6%

($1,336.7)

-1.8%

($673.7)

Essex

$191,573

11,316

-1.9%

($42.1)

-1.1%

($24.8)

Franklin

$111,374

13,956

-1.9%

($30.1)

-1.2%

($18.4)

Fulton

$111,581

15,808

-2.0%

($35.8)

-1.2%

($21.0)

$97,703

17,456

-3.4%

($57.1)

-1.9%

($33.2)

Greene

$184,276

12,895

-1.9%

($45.9)

-1.1%

($25.4)

Hamilton

$172,602

1,055

-0.2%

($0.4)

-0.1%

($0.2)

Herkimer

$105,800

18,066

-1.9%

($35.5)

-1.1%

($21.3)

Jefferson

$132,174

24,333

-2.2%

($70.3)

-1.2%

($38.4)

Kings

$844,612

276,447

-3.1%

($7,288.3)

-1.8%

($4,100.6)

Allegany
Bronx

Cayuga
Chautauqua
Chemung
Chenango

Genesee

Lewis

Number of
Owner Occupied
Homes**

Home
Value
Declines***

Impact Due to SALT Cap

Potential Home
Equity Losses
(Mil.)

Home
Value
Declines

Potential Home
Equity Losses
(Mil.)
($337.8)

$88,680

7,849

-2.1%

($14.6)

-1.2%

($8.7)

Livingston

$124,683

17,745

-4.3%

($95.6)

-2.5%

($54.8)

Madison

$130,100

19,703

-4.2%

($107.7)

-2.5%

($63.6)

Monroe

$145,443

191,707

-6.6%

($1,850.3)

-3.5%

($979.9)

Montgomery
Nassau
New York

$82,796

13,040

-2.4%

($26.1)

-1.4%

($15.4)

$574,326

353,420

-9.4%

($19,152.1)

-6.3%

($12,700.1)

$1,356,866

174,361

-10.4%

($24,622.5)

-6.4%

($15,157.5)

Niagara

$106,812

62,309

-3.5%

($235.8)

-2.0%

($134.5)

Oneida

$103,677

60,083

-2.5%

($158.2)

-1.4%

($89.6)

Onondaga

$138,508

120,159

-5.8%

($959.1)

-3.1%

($517.4)

Ontario

$193,999

32,075

-5.5%

($344.4)

-3.2%

($197.1)

Orange

$225,088

85,306

-7.3%

($1,408.6)

-4.5%

($865.2)

(Continued on next page)

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Table E1: Estimated Impact of the 2017 Tax Act on New York State Home Prices (cont'd)
Total Impact

County

Average Single
Family Home
Prices*

Orleans

$85,896

12,186

-3.0%

($31.8)

-1.9%

($19.5)
($67.6)

Oswego

Number of
Owner Occupied
Homes**

Home
Value
Declines***

Potential Home
Equity Losses
(Mil.)

Impact Due to SALT Cap
Home
Value
Declines

Potential Home
Equity Losses
(Mil.)

$94,114

32,850

-3.9%

($122.0)

-2.2%

Otsego

$128,415

17,350

-1.8%

($41.0)

-1.1%

($24.0)

Putnam

$327,489

27,961

-8.7%

($795.5)

-5.8%

($532.7)

Queens

$544,869

341,363

-2.3%

($4,326.6)

-1.3%

($2,502.6)

Rensselaer

$152,323

40,749

-4.3%

($268.4)

-2.4%

($151.6)

Richmond

$463,444

114,502

-1.9%

($1,012.5)

-1.2%

($616.6)

Rockland

$423,479

68,276

-8.7%

($2,519.2)

-5.9%

($1,714.4)

St. Lawrence

$81,936

29,591

-2.3%

($55.4)

-1.3%

($32.0)

Saratoga

$262,861

65,099

-3.8%

($643.1)

-2.0%

($335.2)

Schenectady

$143,247

36,997

-5.4%

($284.9)

-3.1%

($163.4)

Schoharie

$101,489

9,287

-1.9%

($17.9)

-1.1%

($10.7)

Schuyler

$116,098

5,767

-3.2%

($21.1)

-1.9%

($12.8)

Seneca

$129,648

9,922

-3.0%

($38.8)

-1.9%

($23.8)

Steuben

$107,609

28,545

-4.0%

($122.2)

-2.3%

($71.4)

Suffolk

$457,522

389,182

-6.8%

($12,060.2)

-4.2%

($7,559.4)

Sullivan

$132,530

18,762

-2.3%

($57.6)

-1.4%

($33.7)

Tioga

$103,007

15,415

-3.6%

($58.0)

-2.2%

($34.7)

Tompkins

$215,273

21,175

-5.2%

($238.9)

-3.0%

($134.7)

Ulster

$193,453

48,343

-4.3%

($405.8)

-2.6%

($242.3)

Warren

$230,093

19,037

-2.0%

($87.1)

-1.1%

($49.2)

Washington

$130,067

17,368

-2.0%

($46.3)

-1.2%

($28.2)

Wayne

$115,407

28,037

-4.6%

($149.1)

-2.7%

($87.8)

Westchester

$691,392

210,004

-11.1%

($16,115.5)

-7.6%

($11,038.2)

$91,718

11,936

-2.8%

($30.6)

-1.7%

($18.2)

$162,224

7,346

-2.0%

($24.1)

-1.3%

($15.6)

3,894,613

-

($100,782.9)

-

($63,111.4)

Wyoming
Yates
Statewide

-

Sources: Corelogic via Moody's Analytics (*); 2016 American Community Survey 5-year estimates (**); Moody's Analytics
(***); DOB staff estimates.

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