As the National Commission on Fiscal Responsibility and Reform prepares to deliver its recommendations for fixing the country's spiraling debt and deficit problems to the White House, the housing industry braces for yet another blow. Clearly in the crosshairs as the commission struggles to boost the country's revenues and rein in spending are housing-related tax subsidies, not the least of which is the coveted mortgage interest deduction (MID), which allows taxpayers to deduct the interest paid on their mortgages from their taxable income.
Two trial balloons have been sent out in recent days in the form of draft proposals. The first was issued Nov. 8 by former White House chief of staff Erskine Bowles and former Wyoming Sen. Alan Simpson, both co-chairmen of the president's deficit commission. Meanwhile, Alice Rivlin, former director of the Office of Management and Budget and a member of the president's deficit commission, released a rival plan Nov. 17 in conjunction with Rep. Pete Domenici (R-N.M.), as co-chairs of a Bipartisan Policy Center-supported shadow deficit committee known as the Debt Reduction Task Force.
Despite the differences in the plans--the Rivlin-Domenici plan, for example, calls for a two-year payroll tax holiday--there are some common overarching themes. Both plans call for sweeping cuts in government spending and a drastic overhaul of the tax system, as well as policy changes to keep health-care expenditures in check and ensure the solvency of Social Security long term.
Tax code reform could prove detrimental to the housing industry's already fragile health. Both deficit and debt reduction plans aim to simplify the code while broadening the tax base and lowering tax rates. In doing so, both individual and corporate taxpayers stand to lose a number of key tax benefits, ranging from charitable giving to capital gains taxation. For homeowners, this could mean the loss of state and local property tax and MIDs.
However, Henry Cisneros, executive chairman of CityView and a member of the debt reduction task force headed by Rivlin and Domenici, said the MID is more or less safe under his committee's plan. In an effort to reduce government tax expenditures, the deduction would be converted to a credit.
"To eliminate MID, it would break a pledge to homeowners about the value of homeownership and deal an egregious blow to housing, which doesn't need it," he said.
Rob Dietz, NAHB's assistant vice president of tax and policy issues, said converting the deduction to a credit would benefit lower-income earners; however, a tax credit rate below 20% would represent a net cut in the budget size of the program. Historically, critics of the MID have argued that the bulk of the deduction's benefit has been concentrated in the higher income brackets. Dietz countered that under present law, nearly 70% of the tax benefits of the MID go to households with less than $200,000, below the administration's definition of middle class.
However, while the credit is a better option than doing away with the MID altogether, the broad-brush tax reform outlined in the proposals is concerning, said Dietz.
"There's a movement to treat tax expenditures like they are government spending in disguise," he said. "[But] essentially what we are talking about is letting people keep their own money."
Moreover, Dietz argued that although the tax rates would go down under either plan, taxpayers could end up having more of their dollars going to taxes.
"By ripping out all these deductions, they are making taxable income closer to gross income," he said. The net result being that taxpayers could find that although they are being taxed at a lower rate, they're being taxed on a higher income, resulting in a higher tax bill. Indeed, both commissions appear to be aiming for total federal government revenues to equal 21% of GDP, above the approximately 18% of GDP average over the last 40 years.
But no matter what plan ends up being picked up as a legislative matter in Congress, it's clear that significant tax reform is likely to be a major component. And given that the MID is one of the government's single largest tax expenditures, it's a conspicuous place for policymakers to trim.
"There are a lot of transitional issues [with tax reform], especially with MID because it affects so many people," said Mark Robyn, staff economist for the Tax Foundation. "But I still think there is a pretty wide consensus among policy wonks who don't have to worry about getting re-elected that the MID has got to go."
For some in the industry, an end to the MID won't be the blow to housing that many expect.
"I think the industry values it too highly," said Moodys.com economist Mark Zandi of the MID. "It's not at all helpful to housing and construction."
Zandi's argument is that the interest deduction actually functions to inflate home prices by as much as 5%. By decreasing affordability, it hampers housing demand, creating no benefit to home sales or construction. With that said, however, he does not advocate for the government going cold turkey on the issue; a more gradual phasing out is more appropriate, he said.
However, other industry stakeholders like Ken Gear, who heads up government relations for the industry group Leading Builders of America, argue that any change in policy that could hamper housing will have a negative effect on the overall economy.
"I think what they ought to do is leave it alone," he said.
What will come of the MID remains to be seen. The president's deficit commission will release its final recommendations to the White House on Dec 1. From there, supporters hope the plan will be picked up as a legislative proposal. However, there's uncertainty as to whether the commission will reach an agreement on a proposal; any approved plan requires the support of at least 14 of the commission's 18 members.
In the meantime, Cisneros said his deficit task force has taken a critical first step in curtailing runaway government spending and stimulating economic recovery by putting a concrete plan before Congress.
"We are hopeful that Congress will act and the administration will lead," Cisneros said.