[IMC] Housing News: Housing tax incentive skirmish mounts

[Housing Affairs Letter]

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**Housing Tax Incentive Skirmish Mounts**

Differing approaches to income tax reform came together at a House Ways
& Means Committee hearing Apr. 25 on housing tax incentives, and the
weight of their views leans heavily toward preserving incentives -- but
with qualifications.

National Association of Home Builders' Robert Dietz tells lawmakers to
preserve the mortgage interest deduction and low income housing tax
credits and he reels off a litany of what the NAHB's assistant VP calls
false assumptions about the MID.

"First, we frequently hear that few homeowners benefit from the mortgage
interest deduction because itemization is required," Dietz says. "In
fact, most homeowners will claim it. In 2009, 35 million taxpayers, or
70% of homeowners with a mortgage, claimed the mortgage deduction in
that year."

The committee is studying a range of options, several of which would
reduce or eliminate housing tax incentives in return for lower marginal
tax rates.

Dietz warns of pitfalls when undertaking tax reform. "Homebuilding is an
industry dominated by small businesses, so the idea of simplifying the
complicated tax rules related to business has great appeal," Dietz says.
"At the same time, our industry remembers painful lessons from the 1986
Tax Reform Act, when the commercial and multifamily sectors experienced
a downturn due to unintended consequences. Moreover, when housing fares
well, it spurs job and economic growth."

Jane Gravelle, economic specialist with the Congressional Research
Service, outlines projected savings if tax incentives are eliminated.
She says the most significant housing provisions are linked with
owner-occupied housing, and notes a $75 billion increase in revenues by
FY 2015 if the MID is eliminated. Ending the real property tax deduction
would reap $30.4 billion, and exclusion of capital gains would produce
$26 billion.

Mark Calabria, the Cato Institute's financial regulation expert, tells
lawmakers to develop a tax code with low-simple flat rates and few if
any deductions. The conservative think tank recommends elimination of
the MID and the local property tax deduction contending the MID doesn't
have a significant impact on the homeownership rate.

Eric Toder, of the Urban-Brookings Tax Policy Center, argues for MID
preservation as well, calling it a popular tax benefit. Toder contends
elimination of the MID would raise taxes by $696 per household by 2022.
Instead, Toder suggests capping the deduction at the first $500,000 of
home debt.

The four witnesses are among nine economists and advocates testifying
before the tax-writing committee in its initial foray into the hot
button political issue. The deduction is among the most popular benefits
in the tax law, and earlier attempts to revise it dissipated. Tax reform
prospects this year are uncertain and depend on timing. If it is pushed
into late 2013, lawmakers are likely to balance the benefits of action
against the sense of the political landscape coming into a crucial
mid-term election.

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