Bankers, Realtors Unite Against Proposed Homeowner Tax Benefit Reductionsby Blanche Evans
Big spenders on Capital Hill have been trying to cut homeowner benefits for years, but have so far been thwarted by an unlikely group of heroes -- the National Association of Realtors®. Now the NAR is being joined in its fight against seeing the recommendations of President Bush's Tax Reform panel adopted by Congress.
Believe it or not, the NAR is the largest trade association in the world and is the only group that lobbies for homeowner rights. It's the NAR that gets the cap raised on conventional loan amounts so the loans can easily be purchased and sold on the secondary market, creating more money for lending. The NAR also lobbies to keep the generous homeowner benefits that were provided through the Tax Relief Act of 1997.
Nearly every year, the National Association of Realtors' lobbyists battle with congresspersons who propose ideas to take tax benefits away from homeowners. Homeowners currently benefit by being able to deduct a portion of their mortgage interest from their income taxes. They are also able to deduct state property taxes from their federal income taxes. Third, they are able to keep a large amount of capital gains if they occupy a homestead for two out of five years, up to $250,000 for single filers and $500,000 for married couples.
With homeowners so fat with equity gains, some pro-banks and pro-big business supporters would like to see some of that money return to the stock market -- where it can be spent on ridiculously high CEO salaries, parties for trophy wives, oversized mansions and other back-slapping cronyism benefits.
The way to do that is to make homeownership a little less attractive.
The first line of assault is on the mortgage interest rate deduction, which will hurt the middle class, the very group that has benefited most from rising home prices.
The last time interest rates were eliminated, consumers lost taxpayer interest deductions on credit cards and automobile loans, back in 1986.
Perhaps President Bush and his big-spending friends are hoping consumers' foggy memories will allow them to one day forget that they used to get mortgage interest rate deductions, state and local property tax deductions, and were allowed to skip paying taxes on broad capital gains derived from homestead sales.
But a few organizations are going to make sure that attempts to tamper with homeowner tax benefits are met with resistance.
The Mortgage Bankers Association (MBA) is joining the NAR in expressing its opposition to several proposals affecting homeownership.
"When he established this bipartisan panel, the President gave clear direction that any reform must simplify the tax code, be fair, bolster economic growth, and support homeownership," said Jonathan L. Kempner, president and chief executive officer of MBA. "Unfortunately, the recommendations issued today that relate to the housing market fail to meet these criteria. And, let's face it -- no matter how you dress this up it's a tax increase for a lot of working Americans."
Replacing the mortgage interest deduction with a tax credit for 15 percent of the interest paid on a mortgage valued below the current Federal Housing Administration (FHA) loan limit effectively increases taxes on homeowners. This would have the largest impact in high cost areas, such as New Jersey, California and Florida, and could cause a significant drop in house prices in those areas, slowing the housing industry that led the country out of the recent recession and is a key driver of the economy, says the MBA. Additionally, this proposed change would add more complexity to the tax code by requiring grandfathering provisions and additional indexing.
The MBA said the proposal would harm consumers as well, who rely on building equity in a home to build wealth, and pay for the "rising costs of a college education for their children or prepare for unexpected financial situations. The panel's proposal would raise the cost of tapping the equity in one's home in order to pay for such important expenses.
This proposal would also require different tax treatments for home equity loans and cash-out refinances, adding complexity to a portion of the tax code that currently is fairly straightforward."
Eliminating the deductions for local real estate taxes, i.e., property taxes, would have an even broader impact -- reaching those who own their homes free and clear in addition to those who still have a mortgage. Retirees are particularly affected since many of them own their homes outright and the property tax deduction is one of the few deductions they can take. Living on a fixed income, the elimination of this deduction would be a significant added expense that many retirees cannot afford. It also particularly impacts residents of states with especially high property taxes.
"MBA supports the President's goal of simplifying the tax code in order to reduce compliance costs for average Americans. The increase in efficiency will spur economic growth," said Kempner. "Yet, we cannot support provisions, such as those outlined above, that would harm the housing markets and hurt homeowners. We look forward to working with the panel and legislators to develop proposals that achieve the goal of simplification without putting the housing market in jeopardy."
Also joining the MBA and the NAR is the National Association of Mortgage Brokers (NAMB) which has gone on record to support protection for the federal mortgage interest deduction.
"The federal mortgage interest tax deduction helps many Americans realize the dream of homownership by reducing the cost of owning a home," says NAMB President Jim Nabors, II, CRMS.
Steve Cook, spokesperson for the NAR, expects a long, loud debate over the reforms, mainly because no one really knows what the possible fallout will be. The NAR doesn't have current data on what the loss of tax incentives would really do to the housing portion of the economy, but Cook says that the organization's research department is feverishly working on it.
"Such ill-conceived proposals should be viewed as what they really are -- hidden tax increases for the nation's homeowners, specifically, the middle class," says Cook. "A little more than 60 percent of the families who claim the mortgage interest deduction have household incomes between $60,000 and $200,000. Even those making under $5,000 adjusted gross income are using this tax advantage; in fact, about 152,000 of the 36 million returns that utilize the deduction show an adjusted gross income of less than $5,000.
Cook says that the organization studies homebuyer incentives and that tax incentives for first-time homebuyers rank high, and among repeat homebuyers, tax deductions are often specifically mentioned as reasons to buy a home.
Based on the panel's recommendations, the Treasury will also write recommendations, and then Congress will write legislation that will have to be passed.
Published: November 7, 2005