Dave Clark

By the time President Bush's tax reform panel issued its recommendations Nov. 1, the housing industry's counteroffensive was well under way. Both the NAHB and the National Association of Realtors had devoted sections of their Web sites to fighting the proposals, and other groups, such as the Mortgage Bankers Association, quickly issued press releases denouncing the plans.

The tax panel raised the industry's ire by suggesting that the home mortgage–interest deduction, long a sacred cow of the tax code, be replaced with a tax credit worth 15 percent of the interest paid. It further stoked the fire with its recommendations that the deductions for interest on second-home mortgages and home-equity loans and state and local taxes be eliminated altogether.

“This is a very bad plan for housing and homeowners,” 2005 NAHB president Dave Wilson told a conference call audience in November. “It's a big tax hike for millions of middle-class homeowners.” He added that the proposed changes would “cripple” markets that rely on resort and second-home activity, including his own, Ketchum, Idaho.

Some homeowners would no doubt pay more under this plan. While the current tax structure allows deductions of interest paid on mortgages as high as $1.1 million, the new plan would set lower caps, between $227,147 and $411,704, depending on the local market. What's more, even proponents of the recommendations acknowledge that home prices would likely fall, particularly at the upper end, as buyers would no longer be able to use their tax savings to help afford high mortgage payments.

But the tax reform panel argues that the positives outweigh those negatives. Many of its changes help raise the $1.2 trillion in revenue that would be lost over the next 10 years by eliminating the alternative minimum tax (AMT), which was introduced decades ago to catch wealthy tax evaders but is increasingly ensnaring the middle class because it was never indexed for inflation (if unchanged, it will raise the taxes of more than 21 million taxpayers in 2006 and 52 million by 2015). Many of the people who are likely to see their tax bill grow under the home credit plan would pay higher taxes in the next few years anyhow, due to the AMT. “There's always the temptation to look at the thing that's worst or particularly beneficial for some taxpayers. We have to avoid that and look at the total tax burden,” says James Poterba, an economics professor at MIT and a member of the tax panel.

More Americans would benefit under the home credit, Poterba adds. Currently, only about a third of taxpayers itemize, enabling them to claim the mortgage-interest deduction. “With this, you don't have to be an itemizer,” he says. “Everyone with a mortgage will get some tax relief.”

According to the results of a survey of 800 likely voters conducted by the NAHB, many taxpayers are siding with the housing industry. Nearly three-quarters of the survey respondents said it's extremely important or very important to keep the mortgage-interest deduction. “Changes in tax structures are always very, very difficult to make,” says Bill Fox, an economics professor at the University of Tennessee and an expert on tax systems. “But there may be some ideas out there that will get more serious consideration once people realize what the AMT is taking away.”

In the meantime, the NAHB is encouraging its members to let lawmakers know where they stand. “We're not going to sit back and watch,” asserts Jerry Howard, CEO and executive vice president of the NAHB. “We do think the AMT should be repealed, but not at the expense of housing. And would we be willing to compromise? No.”

Learn more about markets featured in this article: Memphis, TN.