ReNews -- Remodelors Council News - 11/09/2005 (Plain Text Version)Don Novak CGR, CAPS, CKB, GMB View Graphical Version | Subscribe to NAHB Publications | Email our Editor... In this issue: Tax Reform Panel Declares Open Season on Home OwnersA presidential commission report proposing a radical overhaul of the nation’s tax code was blasted by NAHB as “the biggest tax hike for home owners ever proposed” after it was presented on Nov. 1 to Treasury Secretary John Snow. Developed by the President’s Advisory Panel on Federal Tax Reform over the past 10 months, the tax overhaul would collapse six income brackets into four, eliminate the Alternative Minimum Tax and replace the popular mortgage interest deduction with a considerably more limited 15% tax credit. Also gone would be deductions for state and local taxes and interest deductions for home equity loans and second homes. The panel’s recommendations will now be reviewed by the Administration, and if embraced by President Bush could be included in his State of the Union address in January. Several parameters governed the panel’s final recommendation. The proposal had to be revenue-neutral, promote homeownership and charitable giving, and repeal the Alternative Minimum Tax, which will cost approximately $1.2 trillion over the next 10 years. Though President Bush explicitly stated that one of the objectives was to devise a plan that would promote homeownership, NAHB believes the panel’s recommendations would do just the opposite by wiping out several major housing tax incentives in the current code. The White House is under no obligation to follow the panel’s findings. Biggest Tax Hike for Home Owners Ever “It’s the biggest tax hike for home owners ever considered,” said Jerry Howard, executive vice president and CEO of NAHB. “Replacing the mortgage interest deduction would punish millions of home owners, particularly those living in California and other high-cost markets. Equally disturbing, the tax reform proposals would reduce home values; eliminate the Low Income Housing Tax Credit, one of the few tools available to construct or renovate affordable rental housing; and it would send a chill through the housing industry, which has been leading the economic expansion for the past three years.” Under the panel’s plan, most deductions, credits and other tax breaks would be eliminated under a dramatically simplified income tax structure. The current six tax brackets ranging from 10% to 35% would be replaced by four tax brackets of 15%, 25%, 30% and 33%. Under current tax law, home owners are permitted to deduct interest payments on mortgage debt of up to $1.1 million, including $100,000 for home equity loans. That deduction, under the tax panel’s proposal, would be replaced by a much more limited home credit equal to 15% of interest paid on a principal residence. The ceiling on the mortgage amount used for calculating the credit would be based on regional housing costs and range from $227,000 to $412,000. Someone who owned a house worth more than that would still get the credit up to the limit for the area. How would this affect the average home-owning taxpayer? Consider a household with an annual income of $100,000 holding a 30-year, $300,000 mortgage at 6% and a $50,000 home equity loan at 7% that was taken out to pay for home improvements or college tuition. Under current law, the household is paying annual interest of about $21,338 on the two loans, which reduces the taxes they owe by $3,201. A Blow to Home Values Under the advisory panel’s housing credit, the savings from the interest deduction would be $2,685, which represents a decline in the current value of their mortgage interest deduction of $516, or about 16%. No deduction would be allowed for home equity. (For more analysis from NAHB's economists on how the new plan would increase the federal tax liabilities of home owners, click here.) Equally disturbing for the nation’s 74 million home owners, most economists agree that this plan is likely to depress home values. Reducing the tax incentives for homeownership would soften demand for homes and home purchases, which in turn would exert downward pressure on home prices. “The timing for such a proposal could not be worse,” said Howard. “Home appreciation rates are already easing, sales are slowing and interest rates are rising. Considering that a good portion of the wealth of the nation’s home owners comes from the net equity they have built up in their homes, this would be a tremendous blow for millions of working families.” The panel’s recommendations landed with a giant thud on Capitol Hill, with lawmakers on both sides of the aisle panning the report. (To read a related story, click here.) “Unfortunately, President Bush's tax panel is a Trojan horse — using so-called simplification to cut taxes for the wealthy while increasing taxes for middle-class families,” said House Minority Leader Nancy Pelosi (D-Calif.). “Those of us who have long advocated fundamental tax reform, for decades in some cases, have reason to wonder — especially given President Bush’s well-deserved reputation for thinking big — ‘Where’s the vision? Where’s the boldness?’” Rep. Tom DeLay (R-Texas) wrote in a critical op-ed in the Nov. 4 Washington Post. The advisory panel’s recommendations would be felt most acutely by home owners in high-cost markets. For example, 25% of all the home loans in California last year exceeded the panel’s caps on mortgages eligible for the tax break. Nationwide, two-thirds of all the mortgages above the proposed cap limits were originated in five states: California, Florida, Texas, Illinois and Arizona. The panel did elect to keep one housing tax preference intact, albeit with changes. Under current law, up to $500,000 of capital gains on a home that a taxpayer has owned and used as their principal residence for two out of the last five years may be excluded. The panel recommended increasing the occupancy requirement to three out of five years. Tax Savings to Plunge Of the nation’s 74 million home owners, 37 million utilized the mortgage interest deduction for a total tax savings of $70 billion in 2004. And 43 million households deducted state and local taxes (including sales and personal property) for a tax savings of $45 billion. Under the panel’s proposal to phase in the 15% mortgage interest housing credit for existing home owners over a five-year period, it is estimated that the value of the deduction would eventually fall sharply. The tax panel determined that curtailing deductions for mortgages interest and eradicating deductions for state and local property taxes were needed to compensate for the revenue that will be lost by abolishing the Alternative Minimum Tax. Established in 1969 to ensure that upper-income earners pay their fair share of taxes, the AMT has been hitting an increasing number of households because it was never indexed for inflation. Also of concern to the nation’s home builders, the panel’s proposal would limit the exclusion for employer-provided health insurance to $11,500 for families and $5,000 for single individuals. These amounts are also roughly equal to the maximum amount of tax-free health insurance coverage provided to members of Congress and other federal employees. To read housing-related provisions of the tax panel’s proposal, click here. For resources on the NAHB Web site related to the tax reform plan, click here. For more information, e-mail Michael Strauss at NAHB, or call him at 800-368-5242 x8252. For more information or to contact us directly, please visit www.NAHB.org | ©2005, National Association of Home Builders |