Staff members of the House and Senate tax-writing committees are putting together legislative drafts that may determine the fate of real estate’s most prized tax benefits – first and second home-mortgage interest deductions, property tax write-offs, capital gains exclusions and others.
Both committees’ chairmen have promised major tax reform proposals this fall.
On the Senate side, Finance Committee Chairman Max Baucus, D-Mont., asked colleagues in both parties to submit recommendations. To provide senators political cover and deniability, the committee put all recommendations under a 50-year top-secret classification.
On the House side, Ways and Means Committee Chairman Dave Camp, R-Mich., instructed staff to move ahead with drafts, allowing the committee to consider a final tax reform bill in October.
So what’s really on the chopping block?
Here’s a quick overview: The House bill under construction seeks to reduce individual and corporate marginal tax rates across the board. Camp has said he wants to clear out deductions, exclusions and other long-time tax code subsidies enough to lower individual taxes to a top marginal rate of 25 percent, down from the current 39.6 percent. He also wants to eliminate the alternative minimum tax (AMT) and slash corporate tax rates.
The problem, though, is that lowering tax rates to these levels would cost trillions of dollars in lost revenues over the coming decade and would only be partially paid for by eliminating or cutting the vast majority of current tax preferences, including for homeowners.
Another complication: Major tax benefits that have been in existence for decades, such as the mortgage interest and property tax deductions, are so welded into the system that eliminating them, or sharply reducing them, would send shock waves throughout the national economy. The Tax Foundation, a Washington-based think tank that describes itself as nonpartisan, released a study at the end of July projecting that an elimination of the mortgage interest write-off would cut the gross domestic product (GDP) by $254 billion based on incomes in 2012, and would result in the loss of 659,000 jobs. In a separate study, the Tax Foundation projected that elimination of homeowner property tax deductions would lower GDP by $94 billion and trigger the loss of 216,000 jobs.
Findings such as these lead housing proponents to believe that neither the House nor the Senate bill can afford to make drastic reductions to long-standing homeowner tax benefits.
Other industry analysts aren’t so sure. Not only did the Ways and Means Committee hear a panel of prominent economists slam the housing write-offs as inefficient, they note, but Camp’s own income tax cut targets could take precedence over retaining current deductions. On top of that, Democrats in the Senate want to raise revenues through tax reform, not cut them.
If that’s the case, something’s got to give. And that might require lower write-offs for housing – unpalatable politically as they may be a year before congressional elections. Whether tax reform legislation that does that could actually pass either house, however – in a year where Republicans and Democrats can’t even pass a budget to fund the government – is much in doubt.
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