The Mortgage Deduction Battle Looms Ahead
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As the Presidential Tax Reform Panel proposes a reduction in the home mortgage deduction, so does the real estate lobby prepare to battle to preserve the whole tax deduction.
Limit tax breaks to mortgage loans on primary homes. - Replace the mortgage-interest deduction with a tax credit equal to 15 percent of the interest paid.
- Cap the amount of the loan eligible for that credit. The cap would be set locally, depending on prevailing prices. The proposed range is $227,000 to $412,000, with the District and nearby jurisdictions at the high end.
- Phase in the caps over a five-year period.
- Eliminate the deduction for state and local taxes.
Proponents of the plan propose that the reform would be a progressive reform, affecting the rich much more the poor, plus reduce housing costs to help the poor. It is interesting that such a socialistic plan would emanate from the Bush White House.
Opponents of the plan have responded sharply and strongly.
The real estate industry’s quick, sharp attack on the plan led many observers to declare the proposal dead on arrival. The National Association of Realtors, Mortgage Bankers Association and other industry leaders insist that the deduction would drive home prices down as much as 15 percent and undermine consumer confidence, slowing a major engine of the economy.
Jerry Howard, chief executive and vice president of the National Association of Home Builders, pledged Thursday to “do our best to convince the administration to reject the proposal.” The trade association released a survey of 800 likely voters by Public Opinion Strategies taken last weekend that found that 75 percent opposed the proposals.
This will be an interesting battle. When the commission was created, it was to creatively and drastically change the tax system to remove the alternative minimum tax. Opponents of the plan have pointed out that the current proposals are piecemeal and do very little to change the tax code, and punish the achievers to an even greater extent.
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Comment by Hari on 17 November 2005:
Limiting housing subsidies is a good idea (and I’m in California!)
In an ideal world, no one would have to pay taxes. But given the need for taxes, and to do it in the fairest and the most economically efficient manner possible, the proposal to limit mortgage deductions is a very good and timely one.
The current housing subsidies:
1) Encourage and reward those taking on the largest possible amounts of mortgage and home-equity debt, as early as possible.
2) Discourage saving in general, and saving for a home purchase in particular because the savings are at a heavy tax disadvantage. The savings also lose purchasing power rapidly because the home prices are inflated by cheap and tax-advantaged credit.
3) Contrary to popular belief, make housing less affordable by inflating home prices excessively.
The proper way to make housing affordable is not by pumping cheap credit into the system while endlessly inflating prices, but by keeping house prices low and increasing supply. This will also reward those that save more while making it easier for everyone to pay off the principal (what an alien concept!?) instead of encouraging overconsumption and outsized debts.
4) Distort the economy by channeling capital away from more productive investments.
These effects are very clearly seen today in abysmal personal savings rates, and a housing bubble that is pushing people into taking larger and riskier loans.
Over the long run, limiting these housing subsidies will have a very positive effect because saving and investment will be increased, housing will be cheaper, and the economy will become more efficient and productive.
In the short run of course, there will be huge resistance to these proposals from those who stand to lose the most. Home owners have seen huge un-earned increases in their wealth in the recent past. These increases are largely a transfer of wealth from current and future homebuyers, and other taxpayers. The prospect of these unexpected wealth gains slowing down or reversing is not a compelling reason to avoid implementing a better and more equitable tax code.
Also, most opinions in the media seem to assume that rising home prices are a “good thing” to be cheered, while advocating reduced home prices is somehow completely unacceptable and almost sacrilegious. The past several years have seen enormous inflation in home prices with little income or job growth, primarily fueled by explosion of credit, tax subsidies and speculation. After 100% or more increase in home prices, if the prices are scaled back 20 or 30%, is it not something that should be welcomed? Are unlimited wealth gains for every homeowner and real-estate speculator part of a social contract that needs to be underwritten by future homebuyers, savers and other taxpayers?
Transitions can be tricky and specific measures might be looked into to ease the pain, but there is nothing more important for long run US economic health than to encourage saving and investment. These changes to the tax code are a step in the right direction.