If you’ve been following the news at all we’re in trouble—financially speaking and as a country. Our debt load is so unserviceable that in just a decade or so we’ll be more or less using 100% of the U.S. budget to pay off the interest and pay for entitlements. That’s completely untenable and one of the proposals on the docket of potential solutions is scaling back or eliminating the mortgage tax deduction. These proposals to scale back on the mortgage interest deduction and other housing tax provisions were included in a discussion draft from President Obama’s bipartisan Commission on Fiscal Responsibility and Reform. To say that this should concern contractors and homebuilders is an understatement.
The report that made its way into the public sector indicated a desire to do one of three things: either completely eliminate it, or reduce it to primary residences only and/or residences valued at under $500,000. There are also a whole lot of other items in the report, including factors that address the Low Income Housing Tax Credit (LIHTC), deductions for real estate taxes, depreciation rates for rentals, energy tax incentives, and tax-exempt housing bonds. Possibly the most aggressive move is a proposal to raise the capital gains tax.
In order to move forward to Congress, the proposals need to have a highly bipartisan endorsement and vote of 14 out of the 18 commissioners. So far the response has ranged in both response type and energy. Some people simply don’t want their mortgage interest deductions touched, while others see the value in moving these deductions to the standard deduction for all Americans (something that isn’t often brought up but is related to this proposal but may or may not be included in the final proposals.
NAHB was quick to respond to the commission’s released proposals, immediately posting a statement by Chairman Bob Jones “expressing the association’s deep concerns about the mortgage interest deduction proposals.” The NAHB Board of Directors has allocated resources to fight the mortgage interest deduction proposal. Keep in mind that the fiscal commission’s final report is set to be released later this month, so it may not be the exact same as the advanced releases.
The Draft Proposal (as presented by the co-chair)
Tax Reform
- Simplify tax code to three individual rates and one corporate rate
- Reduce the deficit, cap revenue at 21% GDP
- Permanently abolish the AMT (alternative minimum tax)
Option 1: The Zero Plan (Remove, Start Over)
This plan works by eliminating ALL deductions including mortgage interest, property taxes, low-income housing tax credit, etc. and treats capital gains and dividends as ordinary income.
Option 1 base tax rates are 8%, 14% and 23% for individuals, and 26% for corporations. If you keep the child tax credit and the earned income tax credit, “reform” the mortgage interest deduction and health and retirement benefits to “80% of their current level” (whatever that means), rates would need to increase to 12%, 20% and 27% for individuals, and 27% for corporations. If, however, those same deductions are kept at current levels (100%), rates would need to be 13%, 21% and 28% for individuals, and 28% for corporations.
Option 2: Wyden-Gregg Style Reform
This plan first repeals the AMT (alternative minimum tax) and then establishes three personal tax rates at 15%, 25% and 35%. You then triple the standard deduction to $30,000 ($15,000 for individuals) and repeal state and local tax deductions, cafeteria plans, and miscellaneous itemized deductions. The plan would also limit the mortgage interest deduction to primary residences under $500,000. The corporate tax rate would get reduced to 26% an all other deductions would be repealed.
Cutting Spending
So the other big part of the plan involves cutting back on spending (duh!) The cuts would begin in 2012 and actually, to our surprise, include the “third rails” of defense and entitlement. The reductions in spending will bring it down to 22% and eventually 21% of GDP. Overall, they are looking at a $4 trillion reduction in deficit through the next decade. Here are the key numbers of reduction:
- Deficit reduced to 2.2% of GDP by 2015
- Debt reduced to 60% of GDP by 2024 and 40% by 2037
- Reduce discretionary spending in FY2012 to FY2010 or FY2008 levels
- Require a 1% cut in discretionary budget authority every year from FY2013-2015 (FY2015-2020 discretionary budget authority spending would be indexed to inflation)
Notable Recommendations
There were also some notable recommendations. These are recommendations that are not an official directive but are common sense, and as-yet-undefined means of cutting the deficit and lowering debt.
- Malpractice reform
- Move the Transportation Trust Fund to a mandatory program but limit transportation spending to revenue collection (eliminate the ability to use general fund money)
- Increase the gas tax by 15 cents beginning in 2013
- Comprehensive Social Security reform including benefit adjustments, an indexed retirement age, reduced benefits for higher-income retirees, the inclusion of all new state and local employees, and the amount of income subjected to Social Security taxes would be increased
What’s our take on this? It varies. We think that simplification of the tax code will help all industry, however, there is a stigma associated with the mortgage interest deduction – and we wonder if touching that will be a bad move in a housing crisis. There may be some movement towards renting over buying if that particular advantage is taken away – even if the money resurfaces in the standard deduction or somewhere else. As for the rest, we don’t feel they are cutting NEARLY enough in terms of government spending.
The third rails of Social Security and Defense have got to be tapped at a much higher level than they are now – and there is a shrinking place for social programs that are targeted solely to special interest lobbyist groups (good or bad). There needs to be a general, personal call for responsibility and care for others so that the government isn’t the sole provider for our poor, old, and weak. That’s what got us into this mess in the first place. Entitlement thinking has progressively encroached on personal responsibility, charity, and kindness – putting all of that on the federal and local governments. Maybe it’s time we took those things back.
If we do, I think the housing market and construction industry will be one of the first things to recover.
