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Tax Reform – Housing Provisions (and Everything Else) on the Table

| Apr 24, 2013 | Firm News |

In a previous blog, I noted that Rep. Dave Camp (R-MI)(http:/www.camp.house.gov), Chair of Ways and Means, was pursuing a full-blown effort to reform and simplify the tax code. The Senate Finance Committee, under the leadership of Sen. Max Baucus (D-MT) (http:/www.baucus.senate.gov),
is on the same course (although the Senator recently announced that he will not run for reelection in 2014).  Some say tax reform puts us on a collision course with policies that have been embedded in
the Internal Revenue Code and our collective psyches for over 60 years in many cases.  Others say that it is about time to simplify and cut the fat out of the Code.

This latest installment on tax reform focuses on proposals to limit tax benefits afforded
to the housing industry and home ownership. These benefits include the mortgage
interest deduction, the deduction for real property taxes, and the exclusion of
capital gains on the sales of principal residences.  The Joint Committee on Taxation estimates
that these three provisions alone will cost the federal government over $631
billion in tax subsidies (i.e., lost revenue) between 2012-2017. Most of the
so-called housing subsidies benefit taxpayers with incomes over $100,000.  For a copy of the JCT report, visit https://www.jct.gov/publications.html?func=startdown&id=4503.

Take the mortgage
interest deduction, for example.  The
ability to deduct mortgage interest on loans of up to $1.1 million (including
$100,000 of home equity debt) arguably encourages taxpayers to take on more
debt and buy larger homes than they otherwise could afford.  As tax brackets increase, the benefit of the
deduction also increases, although under the new tax law known as ATRA 2012,
the benefits of itemized deductions for “wealthy” taxpayers are substantially
reduced (see my January blog on the tax law changes at http://23.235.213.168/~bluepr23/2013/01/house-and-senate-pass-fiscal-cliff-relief.html).

Even though Rep. Camp and his Committee recognize the
importance of encouraging home ownership, they are launching an aggressive
behind-the-scenes push to rewrite the Internal Revenue Code, including the
housing subsidies.  While it is unlikely
that the mortgage deduction will be repealed in its entirety, the Ways and
Means Committee will examine several proposals that would convert the deduction
into an income tax credit.

For example, in the recently released Simpson-Bowles
“Illustrative Plan”, the deduction would convert into a 12% credit on up to a
$500,000 mortgage, with no credit allowed for a second home or home equity
line.  For a copy of the plan, click on
the following link: http://www.momentoftruthproject.org/sites/default/files/Full%20Plan%20of%20Securing%20America%27s%20Future.pdf.  A tax credit (instead of a deduction)
would benefit lower-income taxpayers who do not itemize or receive significant
benefits from itemized deductions, and therefore is arguably more progressive
and usable more taxpayers.

In his latest budget proposal, President Obama would cap
itemized deductions – including mortgage interest deductions and real estate
property tax deductions – for taxpayers in the highest tax brackets.  The proposal would allow taxpayers to reduce
their tax liability by no more than 28%.

Ways and Means will be holding hearings on the precise
effect of these and other tax reform proposals on taxpayers and the housing industry, as
well as the impact of other proposals currently on the table.

What do I think?  I
think the tax lobbyists will get rich(er) this summer and fall, protecting the
various interests they represent. As for cutting subsidies that encourage home
buying, I have mixed feelings.  On the
one hand, providing the mortgage interest tax deduction arguably encourages
people to incur more debt than they otherwise would incur to purchase a
home.  On the other hand, buying a home
may be the biggest financial decision most of us face in our lifetimes; if a
key incentive in making that decision is changed adversely, one would think
that the housing market will be adversely affected as well.  Yet, we have to face the reality of a
mounting deficit and an extremely complicated tax Code.  Stay tuned. I will keep you informed of
developments as they happen.