Trade associations representing home builders and real estate agents reacted quickly and negatively to tax provisions in the Obama administration’s 2010 budget plan that would limit mortgage interest deductions for high income homeowners and raise tax rates for limited partnerships.
The Obama plan, which you can find here, would restrict tax deductions for people making $250,000 or more as a way of funding a new health care initiative.
Under the proposal, tax deductions could not reduce a person’s taxable income by more than 28 percent of the deduction amount. So, if a couple were making $350,000 and had $50,000 in deductions for mortgage interest and charitable contributions, for instance, their taxable income would drop by only 28 percent of the deduction.
The plan would also raise the top tax rates for the wealthiest Americans, which Obama promised to do during the election campaign. For people making between $250,000 and $370,000, tax rates would rise from 33% to 36%. For people making more than $370,000, rates would climb from 35% to 39.6%.
The plan would reclassify the tax treatment of carried interest from capital gains taxes to ordinary income. This would raise the taxes on partnership profits from 15% (the current capital gains rate) to, in most cases, 36 to 39.6%, the new tax rates for top earners.
This provision affects the share a partnership’s managers receive as a management fee for their work, income that is currently taxed at low, capital gains rates, rather than ordinary income rates that can be three times higher. Limited partners, who are at greater risk in these deals, would continue to be taxed at capital gains rates. Legislation to affect such a change, largely aimed at hedge funds, has been introduced in Congress in the past and gone nowhere.
Joe Robson, chairman of the National Association of Home Builders, criticized the timing of both changes. He said changing the treatment of carried interest could “significantly impact” the multifamily and commercial real estate industry at a time when they are in the midst of a severe downswing. As for the mortgage-interest change, Robson said:
“With the housing market still reeling from its worst downturn since the Great Depression, this is not the time to talk about raising taxes on home buyers and homeowners. This proposal will increase the cost of housing for many middle-class families, particularly in high-cost areas such as California and the Northeast, which will only further undercut the housing market, exert more downward pressure on home values, and work against the President’s efforts to stabilize housing and turn this economy around.”
The National Association of Realtors sent a letter to the President also criticizing the timing of his proposal. NAR President Charles McMillan said, “There is never a good time to propose something that undermines the basic foundation of homeownership, but given the current housing crisis, this has to be the worst possible time.”
In a statement released today, Senate Finance Committee Chairman Max Baucus (D-Mont.) gave the real estate lobby an opening. In commenting on the administration’s plan, he said, “Some of the reforms and offsets contained or referenced in the budget, such as the limitation on itemized deductions, raise concerns and will require more study as we determine the best policies for getting America back on track.”
The tax package would also raise capital gains rates to 20 percent for couples earning more than $250,000. It also provides for an expansion of net operating loss carryback provisions for all businesses, not just small business under the recent stimulus legislation.
On the appropriations side, the budget provides more money for OSHA enforcement, eliminates a HUD low-income housing program, provides full funding for Community Development Block Grant and Section 8 programs, funds the Affordable Housing Trust Fund, and creates a HUD energy innovation fund.
Boyce Thompson is editorial director of BUILDER magazine.