The House Ways and Means
Committee heard a wide variety of opinions today at a hearing on housing tax
incentives. Representatives of the housing,
building and real estate industries as well as policy experts spoke both in
favor and against the mortgage interest deduction (MID) tax deductions for
property taxes, the real estate capital gains exemption and the low income tax
Robert Dietz, assistant vice president
of the National Association of Home Builders (NAHB), called on Congress to
maintain its support for vital housing tax incentives. "Home building is an industry dominated by small businesses, so the idea
of simplifying the complicated tax rules related to business has great appeal.
At the same time, our industry remembers painful lessons from the 1986 Tax
Reform Act, when the commercial and multifamily sectors experienced a downturn
due to unintended consequences," Dietz said. "Moreover, when housing fares well, it spurs
job and economic growth.
Dietz spoke favorably about the
continued need for the Low Income Housing Tax Credit as a way to attract
investment then addressed what he said were a number of false assumptions
regarding the MID.
"First, we frequently hear that few home owners benefit from the mortgage
interest deduction because itemization is required," he said. "In
fact, most home owners will claim it. In 2009, 35 million taxpayers, or 70
percent of home owners with a mortgage, claimed the mortgage deduction in that
year. Among all home owners who have ever held a mortgage, the vast majority
have claimed the home mortgage deduction for years at a time."
It also does not necessarily encourage the purchase of larger homes. Larger families need larger homes and will
therefore have a higher interest deduction. "The need for a larger home
created the higher home loan deduction, not the other way around," said
He also noted that the cost of housing varies greatly across the nation, so
what appears to be a large deduction for a given home in one area may reflect a
modest home in a high-cost area.
Moreover, the mortgage interest and real estate tax deductions are two of the
few elements in the tax code that that account for differences in
"The real estate tax deduction is an important reminder that home owners
pay more than $300 billion in property taxes each year. This fact is often
ignored in the federal tax debates because these taxes are collected by state
and local governments," said Dietz.
There is also a direct correlation between the age of a home owner and their
resulting benefit from the mortgage interest deduction. As a share of household
income, the largest deductions are for those 35 and younger. The benefit of a
deduction that reduces the net cost of monthly house payments is particularly
important to these home buyers, who typically have less equity, tighter
household budgets, and must meet the needs of a growing family.
"Given this demographic connection, NAHB believes that any policy change
that makes it harder to buy a home, or forces young families to defer home
purchases, will have a significant impact on wealth accumulation and the makeup
of the middle class," said Dietz.
Dietz also defended the MID for second homes which he said is important for
many who don't think of themselves as owning two homes. Repealing the deduction
for second homes would penalize millions of home owners who move from an
existing home and buy a second home in a given tax year. There would be further
negative economic consequences in terms of lost home sales, home construction
and local tax revenues.
Eric Toder, Co-Director of the
Urban-Brookings Tax Policy Center (TPC) said, if the Committee is to achieve
its stated goals of reducing the top individual income tax rate to 25 percent
and maintaining receipts at their baseline projected level of 19.4 percent of
GDP by the end of the decade, it will be necessary to eliminate or pare back
some major tax expenditures. But the mortgage interest deduction is one of the
most popular benefits in the tax law, and politicians have in the past viewed
it as untouchable.
interest deduction is a subsidy that favors investment in home ownership over
investment in rental housing and most other business assets. The main
beneficiaries are upper-middle-income households, and use of the deduction
varies greatly among states. If the goal
is to promote home ownership, the mortgage interest deduction should be
restructured, with more of the subsidy directed to low- and middle-income
taxpayers who are more likely to be deciding whether to own or rent.
Eliminating the MID would
raises taxes by $696 per household by 2022 or 0.66 percent of income. Payers in the upper brackets except the top 1
percent would experience a larger average increase. The impact on those in the lower brackets
would be smaller in part because fewer of those tax payers itemize.
Another suggested change includes capping the deduction at the first $500,000 of home debt. This would raise taxes by an average of $84
per household or 0.08 percent of income with taxpayers in the 80th to 99th percentile
experiencing larger than average increases, those in the bottom four quintiles
seeing little or no tax increase, and the top 1 percent an increase only
slightly less than the average for the entire population. This would disproportionately impact a few high
housing cost areas and have the biggest effect on younger, very high income
earners who have not yet paid down their mortgage debt.
More complex alternatives would involve replacing the MID with a 15 percent
refundable credit and capping interest deductions or replacing the MID with a
20 percent nonrefundable credit and capping eligible debt at $500,000.
Toder said his biggest concern is how paring back the MID is how it might
affect housing prices. Some past research
has found eliminating housing tax incentives has substantial effects on prices but
others have found confounding factors mitigating the effect such as low
interest rates or active investor presence.
"All that said, however it would be prudent to introduce changes
slowly to avoid a major market disruptions."
Mark A. Calabria, Director of
Financial Regulation Studies, Cato Institute told the committee members that a
tax code that would improve both economic growth and housing affordability
would ultimately be one with low, simple flat rates and few if any
He urged the committee to
eliminate the MID and the local property tax deduction in a budget-neutral
manner, lowering overall tax rates for the following reasons.
The MID does not
have a significant impact on homeownership rate.
Its housing price
impact differs dramatically across U.S. cities
Benefits are highly
concentrated among the highest income and most leveraged households
from the non-taxation of imputed rent is almost twice that of the MID. Tax savings from the property tax deduction
is much smaller than either.
Some value of the
MID is actually captured by lenders via higher mortgage rates.
The value of the
MID is positively relate to interest rates.
To the extent that
high loan-to-value rates contributed to the recent financial crisis, removal of
the MID would improve financial stability.
Because households have made
investments and decisions based on the current tax code, he said, changes
should be phased in over a reasonable number of years, but no more than seven.
Jane G. Gravelle, Senior
Specialist in Economic Policy, Congressional Research Service (CRS) told the
Committee that in considering tax reform there are three points to
It is difficult it
identify base broadening provisions that realistically will allow significant
It is even more
difficult to identify provisions that would allow significant reductions of the
top rate while maintaining the current distribution of tax burdens
If the objective of
lowering tax rates is to lower marginal rates to encourage supply side responses,
base broadening will increase effective marginal tax rates and offset in part
or in full the incentive effects of lowering statutory tax rates.
The most significant housing
provisions are associated with owner-occupied housing - mortgage interest
deductions (75 billion in revenue in FY 2015), real property tax deduction
($30.4 billion) and the exclusion of capital gains ($26.0 billion.) By comparison, the low income housing credit
reduces revenues by $7.2 billion.
Two out of three of these
owner-occupied provisions are already subject to caps. Are these provisions desirable candidates for
base broadening? Many economists have
criticized the provisions as distorting the allocation of resources, diverting
capital from other uses, encouraging overconsumption of housing, and treating
renters differently than owner-occupants.
As CRS reported earlier, these
provisions would be technically easy to eliminate or reduced and can be view as
causing distortions, but the broad use and popularity of the provisions are barriers
to major revisions. There are also
arguments in favor of keeping them.
ownership has positive neighborhood effects and is a source of wealth building
and enforced savings for middle-income families.
In terms of
fairness, homeownership subsidies do favor homeowners over renters but the MID increases
fairness between homeowners who mortgage and those who finance out of assets.
particular justifications for the capital gains exclusion. Requiring capital gains taxes would
discourage labor mobility by increasing the cost of relocation, discourage
older individuals from scaling down. and impose a penalty on elderly
individuals who are forced to sell for health or financial reasons. This "lock-in" effect may
significantly reduce the potential revenue to be gained.
There are transition
issues, particularly for those in the middle incomes who have recently entered
into large mortgages and may find it difficult to budget if they do not receive
a full offset in in rate cuts. Grandfathering
provisions would not offset effects on housing demand and phasing in would
leave new homeowners with the awareness their deductions will not last.
Owner occupied subsidies are not generally the most significant tax
preferences to those in the top brackets, partially because of caps but also
because as incomes rise, spending on housing does not keep up. Also high income taxpayers are less in need
of mortgages and may avoid increases taxes by paying off mortgages or avoiding
sale of their homes.
The increase in effective marginal tax rates through eliminating deductions
for owner-occupied housing are also not likely to be important for top-bracketed
payers whose deductions are not very important relative to income but they
would increase effective marginal tax rates and offset statutory rate
reductions for taxpayers in the middle and upper income levels.
Gravelle concluded by suggesting that decisions on broadening the base
should focus on the merits of the individual provisions rather than their
contribution to base broadening to permit lower statutory rates.
The committee also heard
testimony from Mark Fleming, Chief Economist, CoreLogic; Phillip Swagel,
Professor of International Economic Policy, University of Maryland School of
Public Policy; Gary Thomas, President, National Association of Realtors; Thomas
Chairman, Moran & Company,
and Robert Moss, Boston Capital, appearing on behalf of the Housing Advisory
Group spoke principally