Tax Writers Hope to Stabilize Housing Industry
A housing recovery moving in fits and starts is fueling new efforts on Capitol Hill to protect tax incentives for home ownership and oppose any reductions in the tax breaks that might be part of a broad tax overhaul.
Top tax writers in both chambers say they want to provide stability to the housing industry.
House Ways and Means Chairman Dave Camp, R-Mich., is expected to move several popular tax breaks backed by the industry, including a proposal (HR 4845) by Rep. Devin Nunes, R-Calif., to make permanent a tax break for private mortgage insurance.
Nunes said the proposal was one of several tax break extensions that would send important signals to key business sectors in a time of slow growth. “We’re trying to get something by the end of the year,” Nunes said. “If you are not going to do a comprehensive fix, you are left with patchwork.”
The mortgage provisions in the tax code have become what seem like the natural order of American economic life, led by the mortgage interest deduction. Camp earlier this year sent ripples of concern through the housing industry when he proposed, as part of a tax overhaul, to limit the interest deduction to mortgages of less than $500,000, rather than the current limit of $1 million and end write-offs for property taxes and home equity loans unless they are used for renovation.
In addition to limiting the principal amount, lawmakers have discussed turning the mortgage deduction into a tax credit so that it could be claimed by all families, whether they itemize deductions or not.
Such dramatic changes no longer seem likely, now that efforts to rewrite the tax code have been buried in this Congress and faltering economic figures have drained enthusiasm for addressing anything as fundamental as mortgage finance.
Instead, both parties are looking to reassure the nation’s 50 million homeowners in a real estate market still looking for equilibrium. The market looked strong last month, with new residential sales growing 18.6 percent from April to the highest annualized level since January 1992. But the Mortgage Bankers Association projects 5.28 million home sales in 2014, a 4 percent drop from last year and the first such decline in four years.
That’s why lawmakers are looking for ways to help build a stronger recovery, not undermine the expansion the market is seeing.
Senate Finance Chairman Ron Wyden has backed a Senate bill (S 2260) with 50 temporary tax break extensions, including a two-year extension of the private mortgage insurance write-off, which would cost $1.9 billion. The measure also includes a $5.4 billion extension of a law that generally allows taxpayers to exclude from their taxable income the amount of debts discharged in a foreclosure or loan restructuring.
The Oregon Democrat said such items would “provide certainty to the economy, protect jobs and maintain important priorities for working families.”
But Are They a Good Idea?
Critics such as Dennis J. Ventry Jr., a tax law expert at the University of California Davis, say some housing incentives such as the mortgage interest tax break have reshaped investor choices and delivered out-sized benefits to the wealthy.
Camp has argued that some tax breaks must be reduced in order to lower rates and boost the economy. The mortgage interest deduction remains an inviting target, with a projected cost of $456 billion over five years.
According to the Office of Management and Budget, it ranks second among 159 tax expenditures, exceeded only by the exclusion for employer health care insurance contributions.
“There are trade-offs to lower rates, and to get the kind of economic growth that the country needs,” Camp said. He said his rate-lowering blueprint would “reduce rates, grow the economy and increase housing prices.”
But in a tough election year, GOP leaders moved away from Camp’s proposal and the notion of curbing popular tax breaks.
Critics such as Reps. Sander M. Levin of Michigan, the ranking Democrat on Ways and Means; and Linda T. Sánchez, D-Calif., believe there will be intense opposition to cuts in incentives like the mortgage interest deduction, especially from lawmakers from areas with high median home values.
“I think they would be a very hard sell,” Sánchez said.
Levin said there was a backlash among constituent groups to Camp’s efforts to scale back tax breaks. “There was real concern about where he was going with the mortgage interest deduction,” Levin said.
With no floor action expected on an overhaul, both Camp and his allies now are making clear that contentious tax trade-offs are on hold.
“I don’t think Camp would propose that, outside of the context of comprehensive tax reform,” said Pat Tiberi of Ohio, a senior Republican tax writer.
Camp said he would emphasize permanent extensions of tax breaks that fit his vision for a tax overhaul, while leaving aside a number of policy disputes.
Nunes said his proposal would show support for a key part of the housing industry, without closing the door on broader changes to the tax code. “It’s all about home ownership,” he said. “It’s no different than the interest deduction.”
Ventry predicted the private mortgage insurance bill would likely to draw broad support because it targets “a different demographic — lower- and middle-income and younger home buyers.” A consumer normally must buy mortgage insurance when he provides a down payment that is less than 20 percent of the purchase price.
Supporters say big bipartisan votes in favor of Nunes’ bill and other proposals could serve as guideposts for a post-election tax break extension package and for a 2015 tax overhaul. Votes on any tweaks to the mortgage interest deduction itself — which became a permanent part of the tax code in 1986 (PL 99-514) — likely would be put off until the 114th Congress.
J.P. Delmore, an assistant vice president for the National Association of Home Builders, said House passage of the Nunes’ bill would “alleviate any uncertainty homeowners will have about the political process for dealing with extenders. They won’t have to stress about whether this provision will be renewed or not.”
Sen. Debbie Stabenow, D-Mich., has a companion bill (S 688) with a GOP co-sponsor, Michael D. Crapo of Idaho, ranking member of the Banking, Housing and Urban Affairs Committee.