Elimination of Mortgage Interest Deduction, Sales Tax on New Homes Proposed

Recommendations to scale back on the mortgage interest deduction and other housing tax provisions included in two deficit reduction draft proposals released one week apart have raised serious concerns for the nation’s home builders.

A discussion draft unveiled on Nov. 10 by Erskine Bowles and former Senator Alan Simpson, the co-chairs of President Obama's bipartisan Commission on Fiscal Responsibility and Reform, lists options to completely eliminate the mortgage interest deduction or limit it to primary residences and mortgages under $500,000.

Other recommendations would be adverse for the Low Income Housing Tax Credit (LIHTC), the deduction for real estate taxes for home owners, accelerated depreciation for rental housing, energy tax incentives and tax-exempt housing bonds. In addition, the proposals would result in significantly higher tax rates for capital gains and dividends.

However, none of these proposals has been formalized, and they are only listed as potential "options." Moreover, the overall plan, which includes many controversial recommendations on Social Security, health care, defense spending and other issues, must win support of 14 of the 18 commissioners in order for Congress to consider the package. This is a high hurdle and requires the support of both Republican and Democratic members of the commission.

The commission itself has no actual power to implement its official recommendations and many of the proposals put forth by the chairmen are unlikely to garner bipartisan support.

Reactions to the plan from both sides of the political aisle have varied, ranging from outright opposition to cautious interest.


A National Sales Tax and Devaluation of the Mortgage Interest Deduction
On Nov. 17, Pete Domenici, a former Republican Senate Budget Committee Chairman, and Alice Rivlin, former head of the Office of Management and Budget under President Clinton and a member of the president’s debt commission, released their own deficit reduction plan as co-chairs of the Bipartisan Policy Center’s Debt Reduction Task Force.

The Domenici-Rivlin plan to reduce America’s deficits would devalue the mortgage interest deduction by replacing it with a 15 percent refundable tax credit for anyone who owns a home. It would also eliminate several other tax rules related to housing, including the Low Income Housing Tax Credit, real estate tax deductions and deductions for second homes and home equity loans.

The proposal would further impose a new 6.5 percent national sales tax that would be applicable for new home sales and remodeling projects, but not for the purchase of existing homes. With the average nationwide price of a new home at $257,500, this plan would impose a whopping $16,738 tax increase on a typical new-home purchase and price more than three million households out of the new-home sales market.

While the Domenici-Rivlin and Bowles-Simpson proposals are sparking controversy across the political spectrum, it has become increasingly clear that policymakers are taking a close look at the mortgage interest deduction and other housing incentives with an eye to scaling them back.

Going forward, NAHB stands poised to vigorously defend the mortgage interest deduction and other critical housing and business provisions in the tax code as events unfold.

The NAHB Board of Directors has allocated resources to fight the anticipated assault on the mortgage interest deduction, and an integrated advocacy campaign is being developed in preparation for the Obama commission's final report to be released in December.

Along these lines, in the near future NAHB will introduce a new website that will provide essential data on the mortgage interest deduction and its importance to American consumers, and will facilitate member and consumer outreach to legislators.

Commentary
It should be clear from these proposals that homeownership, and particularly home building and ownership of new housing, is under attack from Washington. As NAHB works to defeat these proposals, the support of HBA members will be vital. Be ready to respond when asked and call your elected officials in Washington.