President’s Tax Panel Releases Final Report: Implications for Housing Industry

On November 1, the President’s Advisory Panel on Federal Tax Reform (the Panel) released its formal recommendations to the Treasury Department.  The Panel was created by President Bush in early 2005 to recommend ways to reform the federal income tax code to make it simpler, fair and pro-growth.  The Panel’s recommendations will be reviewed by the Treasury Department, presumably with an eye toward political realities, and turned into a legislative vehicle.  It's expected that tax reform will be the centerpiece for President Bush’s State of the Union Address in January, 2006 and the Administration’s legislative proposal will be sent to Capitol Hill following the Address.  Naturally, Congress will have its own ideas for tax reform. 

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 ten years.

With respect to the current housing tax incentives, the Panel recommended the following changes:

• Eliminate the Mortgage Interest Deduction
• Eliminate the state and local tax deduction (including property taxes)
• Eliminate the deduction of interest on a home equity loan
  Eliminate any tax preferences for second homes
• Eliminate the Low Income Housing Tax Credit (LIHTC)
• Replace the MID with a Housing Credit:
  •  All taxpayers would be eligible for the credit
  • The credit would be equal to 15 percent of the interest on a mortgage up to the Federal Housing Administration’s (FHA) limit for the area (approximately $227,000 to $412,000)
  •  Credit can only be taken on a primary residence 
  •  Credit would be effective immediately
  •  Five year phase-in of the FHA cap
• Increase the exclusion from tax on the first $600,000 (indexed for inflation) of capital gains from the sale of a primary residence – current law is $500,000.
  • Increase the time an individual has to live in a home in order to qualify for the exclusion from two out of the last five years (current law) to three out of the last five years

The Panel’s tax proposal represents a massive middle-class tax hike and a radical departure from America’s decades-long commitment to federal tax policies that promote homeownership.  This far-reaching plan to overhaul our tax system will have disastrous consequences for home owners, the housing sector and the American economy.  Reducing the mortgage interest deduction and eliminating the real estate tax deduction will reduce the demand for homes and home purchases.  A softer housing market will put downward pressure on home prices and those with little or no equity will be more likely to default on their mortgage if other economic stresses occur, such as loss of jobs or personal life changes.

The recommendations will curtail housing production, sales and resales at a time when the market is already slowing after years of record-highs.  In high-cost areas, such as California, millions of families will no longer take full advantage of their tax deduction for mortgage interest and lose their deductions for state, local and property taxes.  In today’s era of record-low savings rates, millions of home owners depend on the value of their homes as their primary cash source and as an economic lifeline.  Under this proposal, that lifeline will be severed. 

The recommendations will penalize families who use home equity loans to pay for major home improvements, their children’s college tuitions, or pay for other significant expenditures.  Eliminating the mortgage interest deduction for second homes will seriously harm the economic viability of resort areas and communities across the nation that have a lively second home/vacation property market.  Finally, the Panel’s decision to eliminate the LIHTC, the single greatest catalyst for affordable housing development and preservation in existence today, unnecessarily penalizes millions of lower-income families.

NAHB is committed to defeating all of these proposals and defending the current tax preferences for housing.  NAHB has developed a comprehensive strategy for media, lobbying, and grassroots activism as a means of preserving the values of homeownership in the tax code.

For more information on the President's Tax Panel's final report, e-mail James Tobin in the NAHB's Legislative Relations department, or call him at 800-368-5242 x8258.
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