Cuts to homeowner tax breaks could cost Republicans in 2018 races

SACRAMENTO, Calif. (Reuters) - Laura Russo is just the kind of voter the Republicans need, but the party's proposed tax overhaul, which includes limits on the deductions for mortgage interest, state taxes and property taxes, is pushing her away.

"I would be dramatically affected," she said. An airline pilot and single mother of two, she says that like many in her affluent Loudoun County, Virginia, neighborhood she stretched to buy her home. She fears it will become harder to sell that house or pay her other tax bills if President Donald Trump signs the plan into law.

Russo, 52, said she had voted for the Republican in every presidential race since 1992 until last year when she picked Hillary Clinton. She still voted for Barbara Comstock, the Republican who represents her district in Congress.

"I will not do that again," she said. "The tax bill is the straw that broke the camel's back."

Russo is one of thousands of homeowners in Republican-leaning areas who could be hit by the elimination or reduction of tax breaks for homeowners, a Reuters analysis of federal mortgage and tax data shows, potentially opening those districts to a Democratic challenge in the November 2018 mid-term elections.

The plans are expected to affect mainly the Democratic-leaning "blue states" such as California, New Jersey and New York where homes are expensive, mortgages are huge and state and local taxes tend to be high.

But while these blue states will be hardest hit, county level data also shows there is a significant number of Republican enclaves in districts expected to be hotly contested in next year's polls that will feel the pain. Republican leaning pockets in blue or swing states, such as Orange County, California, or Loudoun County, Virginia, tend to have high property values – and thus the higher mortgages. Many of these areas also tend to have higher state and local income taxes. (Graphic: http://tmsnrt.rs/2A3GLAk)

SWING DISTRICTS

Larry Sabato, director of the non-partisan Center for Politics at the University of Virginia, estimates that there are 16 counties where 2018 races will be toss-ups between Republican incumbents and Democratic challengers.

Reuters data shows that almost half of those counties have an above-average share of new mortgages worth more than $500,000, which is a proposed cap for tax deductions. The results are similar for districts selected as 50-50 ones by The Cook Political Report, a non-partisan newsletter that analyzes U.S. elections.

Among those on Cook's list is a district in Harris County in the deep-red state of Texas. Even though the state has no income tax, thousands of residents of the district, which includes Houston, deduct taxes owed in other states because of work or business done there, and property taxes - the nation's sixth-highest.

Democrats need 24 more seats to win lower house majority from the Republicans, who now control the White House and both houses of Congress. Nancy Pelosi, the House Minority Leader, said in a fundraising note Democrats were rushing out "rapid-response ads" targeting swing voters to capitalize on the concerns, while Kevin Brady, Republican chairman of the House Ways and Means Committee, said on CNBC on Tuesday his party's leadership was working on ways to mollify Republicans in blue states.

That concern is felt on the ground too. Will Estrada, chairman of the Republican party in Loudoun County, said he firmly believed the tax plan would deliver savings to most people. But he said that if Democrats are right and many middle class voters face higher bills, "the GOP is going to be toast in 2018.”

The bill passed by the U.S. House of Representatives on Nov. 16 let homeowners who take out new mortgages deduct only the interest paid on the first $500,000 of a mortgage. It also ends deductions for state and local income taxes, and caps deductions for property taxes at $10,000.

The Senate's plan, passed on Saturday, would keep the mortgage interest deduction as is, on any mortgage up to $1 million, but agrees with the House on state, local and property taxes. The two houses of Congress are now reconciling the two versions.

The Reuters data analysis shows that 37 percent of the total mortgages issued in Orange County in 2016 were above $500,000 and 26 percent in Loudon County. Both include districts represented by Republicans and have some of the highest rates of expensive mortgages in the country.

Comstock, who retained her Virginia seat by 6 percentage points, voted for the House bill, but later asked for changes on deductions, saying through a spokesman that she sought "the best possible tax package for all of her constituents." In Orange County, Republican Representative Darrel Issa voted against the House version, in part, because of how it will affect homeowners. Neither California Republican Dana Rohrabacher, who also voted against the bill, nor Issa would comment on a possible backlash from voters.

BROAD IMPACT

Home buyers in expensive areas count on the mortgage interest deduction to make their payments manageable, said Lawrence Yun, chief economist for the National Association of Realtors, which opposes any changes to the deductions.

Yun says his analysis suggests curbing the mortgage interest deduction would lead to as much as an 8 percent drop in housing values nationwide, and cutting property tax deductions could lead to a further drop of up to 3 percent because it would make buying and selling homes more costly.

“Not just in high cost states like Illinois and California, but relatively speaking in places like Wisconsin, Michigan, Pennsylvania, which were critical in swaying the presidential election,” he said.

Other economists think the impact may be smaller. As refinancing of mortgages becomes less popular and consumers begin paying debt down faster, the market would rebalance, said Richard Green, director of the Lusk Center for Real Estate at the University of Southern California, who forecasts a 5 percent decline in home values.

California's Placer County northeast of Sacramento, where the median home sells for more than $440,000, remains a Republican enclave. But local Republicans have noticed that each year fewer residents vote Republican and their web page bears the slogan, "Keep Placer Red."

To do that, the party will have to keep the loyalty of Republicans like Rudy Coscia, a 36-year-old plastic surgeon who just took out a $900,000 mortgage to buy a four-bedroom house in Granite Bay for $1.1 million.

Coscia is counting on mortgage interest and property tax deductions as he is also making payments on $200,000 worth of medical school loans and $400,000 he borrowed to get his practice started.

"They're hurting their base," he said. "You'd think they'd be trying not to hurt the people who voted for them."

(This version of the story corrects Comstock's election win margin to 6 percent)

(Additional reporting by Brendan O'Brien in Waukesha County, Wisconsin; Writing by Sharon Bernstein; Editing by Damon Darlin and Tomasz Janowski)