Daily Tax Report - April 25, 2013: Hearing on Tax Reform and Residential Real Estate

HEARING ON TAX REFORM AND RESIDENTIAL REAL ESTATE:  Today, the House Ways and Means Committee held a hearing to explore “how certain Federal tax provisions affect the housing sector and homeownership – and the benefits of such investment.”

In his opening statement, Committee Chairman Dave Camp said, “The two primary keys to tax reform are to make the tax code simpler, fairer and more transparent for families and employers, and to strengthen the economy so we can create more jobs and increase wages for American families.  So, today, as part of our top to bottom review of the code, we will examine how tax policy related to residential real estate lines up with those goals.  And, we will do so with two questions in mind:  does current tax policy help American families and does it make our economy stronger?  Homeownership is an integral part of the American dream, and the tax code has long provided a variety of incentives to make it easier for families to buy and own a home. We also know that the real estate industry plays a large role in our economy.  So, this is an area that needs careful, thoughtful review. A number of federal tax preferences provide benefits for residential real estate.  While some are very familiar, others are lesser known.  Although these provisions all pertain to housing, each is governed by different rules and criteria.  If you are looking to understand how complex, confusing and costly our code can be, consider just a few of the following examples involving residential real estate.”  Camp continued, “[p]erhaps the most well-known tax provision affecting real estate is the mortgage interest deduction, which has specific rules and limitations.  For instance, only taxpayers who itemize their deductions may deduct mortgage interest.  Other interactions within the tax code can also limit the use of this provision.  By way of example, the deduction for interest on home equity indebtedness is disallowed for purposes of the Alternative Minimum Tax.  Furthermore, federal tax benefits for real estate treat homeowners differently than renters.  A taxpayer who pays $1,000 per month to rent an apartment may not deduct that amount from income, but a taxpayer who pays mortgage interest of $1,000 may take a deduction if they itemize. Though these examples are from real estate provisions, this complexity plagues the entire code and underscores one simple fact – the tax code is a mess.”  Camp added, “However, as we get started today let me emphasize that not every credit or deduction is a loophole.  The largest investment most people have is their home, and, as I noted earlier, policies like the home mortgage interest deduction have played a big role in home ownership.”  

The witnesses were:

PANEL ONE                    

Mr. Mark Fleming
Chief Economist, CoreLogic

Mr. Eric Toder
Co-Director, Urban-Brookings Tax Policy Center

Ms. Jane Gravelle
Senior Specialist in Economic Policy, Congressional Research Service,

Mr. Mark Calabria
Director of Financial Regulation Studies, Cato Institute

Mr. Phillip Swagel
Professor of International Economic Policy, University of Maryland School of Public Policy

PANEL TWO                    

Mr. Gary Thomas
President, National Association of Realtors

Mr. Robert Dietz
Assistant Vice President for Tax and Policy Issues, National Association of Home Builders

Mr. Thomas Moran
Chairman, Moran & Company, Chicago, IL, appearing on behalf of the National Multi Housing Council and the National Apartment Association

Mr. Robert Moss
Senior Vice President, Boston Capital, Boston, MA, appearing on behalf of the Housing Advisory Group

Dr. Fleming testified on the homebuyer tax credit.  He said that the tax credit “stimulated current demand at the expense of future demand, but did not have a permanent impact on the market.”

Mr. Toder testified, “[t]he mortgage interest deduction is one of the largest individual tax preferences in the Internal Revenue Code.”  He continued, “[i]f the Committee is to achieve its stated goals of reducing the top individual income tax rate to 25 percent and maintaining receipts at their baseline projected level of 19.4 percent of GDP by the end of the decade, it will be necessary to eliminate or pare back some major tax expenditures. But the mortgage interest deduction is one of the most popular benefits in the tax law, and politicians have in the past viewed it as untouchable. The mortgage interest deduction is the only tax benefit that President Reagan promised to protect in 1984 when his Treasury Department was preparing the wide-reaching reform proposals that would form the basis for the 1986 Tax Reform Act. In 2015, according to Tax Policy Center (TPC) estimates, about 40 million taxpayers will benefit from the deduction.”

Ms. Gravelle stated, “The increase in effective marginal tax rates through eliminating deductions for owner-occupied housing are not likely to be important for taxpayers in the top statutory rate bracket where these deductions are not very important relative to income. They would, however, increase effective marginal tax rates and offset statutory rate reductions for taxpayers in the middle and upper middle income levels.”  Ms. Gravelle added, “These observations on marginal effective tax rates suggest that decisions on broadening the base should focus on the merits of the individual provisions rather than their contribution to base broadening to permit lower statutory rates. A review of these provisions suggest the case for eliminating these subsidies is uncertain, and may be quite weak for the capital gains exclusion.”

Dr. Calabria testified, “A tax code that would both improve economic growth and housing affordability would ultimately be a code with low, simple, flat rates with few, if any, deductions. Accordingly I would urge the Committee, as an ultimate objective, to entirely eliminate the mortgage interest deduction (MID) and the deduction for local property taxes. I would also encourage the Committee to do so in a budget-neutral manner, lowering overall tax rates. As households have made significant investments and decisions based upon the current tax code, such a change should be phased in over a reasonable number of years. I would suggest no more than 7 years.”

Professor Swagel stated, “[t]he U.S. tax system today provides considerable subsidies to owner-occupied housing, favoring investment in residential real estate over other activities. These subsidies reflect the important role of housing in the U.S. economy and in American society. And yet it is vital to consider the impacts of this policy and contemplate improvements. The tax code leads Americans to buy homes rather than to rent, to purchase more expensive homes, and to use more debt financing rather than having more equity in their homes. Tax policy further affects the overall allocation of capital in the economy, since the tax advantages for owner-occupied housing lead some resources to be devoted to housing rather than to some other potential uses such as building factories, pipelines, or office buildings. This affects the economy-wide allocation of capital and thus has potentially negative implications for overall investment, economic growth, job creation, and wage gains. A pro-growth tax reform will maintain a tax subsidy for housing but reduce the attendant distortions and refocus the tax benefits to families that likely would not be homeowners otherwise. Tax reform for housing thus presents an opportunity to boost U.S. economic growth and improve measures of equity.”

Mr. Thomas stated, “[i]n order to devise a fairer and simpler tax code, the input of stakeholders at all levels is imperative to avoid unintended consequences. The residential real estate market in America is a large driver of the economy. When housing does well, America does well. The nation has been led out of four of the last six recessions by a recovery in the housing market and it appears that housing is poised to lead us to yet another economic recovery. Despite the price declines, foreclosures, and economic hardship that has befallen our housing market in the past five years, Americans remain committed to the principles of homeownership. They continue to hold the vast majority of their personal wealth in their homes. They continue to believe that ownership of real property is part of the American Dream that was envisioned from the very beginning by our Founders. That is why even high numbers of those who rent consistently support tax incentives for home ownership. Congress should continue to support these same ideals as it seeks to reform the tax code.”

Mr. Dietz testified that the National Association of Home Builders supports “policies that promote a healthy rental housing sector, including support for the Low Income Tax Credit….”  He said that most “homeowners benefit from the mortgage interest deduction” and “most of that benefit flows to younger, middle class families.”  He said that making the mortgage interest deduction “less accessible is likely to diminish the financial success of future generations.”

Mr. Moran stated, “As the Committee drafts legislation, we ask that tax reform takes special care not to harm the thou-sands of businesses in the industry or the 35 million residents who call an apartment home.”  He continued, “The multifamily industry opposes any tax reform effort that would lead to higher taxes or compliance burdens for pass-through entities.” He expressed his “strong opposition to proposals to change the current law governing the tax treatment of carried interest . . .  and said that “efforts to prevent companies from overleveraging are leading to an examination of whether the current 100 percent deduction for business interest expenses should be curtailed.”  Mr. Moran also said that the low income housing tax credit should be maintained and the current law’s estate tax should be preserved.

Mr. Moss testified in support of the low income housing tax credit. He stated, “[u]nlike most tax expenditures before this Committee, which largely encourage activity at the margin -- activity that would occur at some level without the tax support -- there would be virtually no affordable housing development without the Housing Credit program. The reason is that the construction of affordable multifamily housing, rented to lower income families at controlled rents, is fundamentally uneconomic without a subsidy. Housing would not be built or preserved but for the capital contributed because of the Housing Credit. It is the key financing source in almost all affordable rental housing developments in this country.”

In conjunction with the hearing, the Joint Committee On Taxation released,JCX-10-13 - Present Law, Data, And Analysis Relating To Tax Incentives For Residential Real Estate

FINANCE COMMITTEE RELEASES ENERGY TAX REFORM OPTIONS PAPER:  Today, the Senate Finance Committee released another in a series of tax reform options papers titled, “Infrastructure, Energy, and Natural Resources,”


1. [113rd] H.R.1696 : To amend the Internal Revenue Code of 1986 to extend the publicly traded partnership ownership structure to energy power generation projects and transportation fuels, and for other purposes.
Sponsor: Rep Poe, Ted [TX-2] (introduced 4/24/2013)      Cosponsors (5) 
Committees: House Ways and Means 
Latest Major Action: 4/24/2013 Referred to House committee. Status: Referred to the House Committee on Ways and Means.

2. [113rd] H.R.1697 : To amend the Internal Revenue Code of 1986 to allow refunds of Federal motor fuel excise taxes on fuels used in mobile mammography vehicles.
Sponsor: Rep Luetkemeyer, Blaine [MO-3] (introduced 4/24/2013)      Cosponsors (1) 
Committees: House Ways and Means 
Latest Major Action: 4/24/2013 Referred to House committee. Status: Referred to the House Committee on Ways and Means.

3. [113rd] H.R.1704 : To amend the Internal Revenue Code of 1986 to increase the deduction for start-up expenditures for business for 2013 and 2014.
Sponsor: Rep Braley, Bruce L. [IA-1] (introduced 4/24/2013)      Cosponsors (None) 
Committees: House Ways and Means 
Latest Major Action: 4/24/2013 Referred to House committee. Status: Referred to the House Committee on Ways and Means.

4. [113rd] S.795 : A bill to amend the Internal Revenue Code of 1986 to extend the publicly traded partnership ownership structure to energy power generation projects and transportation fuels, and for other purposes.
Sponsor: Sen Coons, Christopher A. [DE] (introduced 4/24/2013)      Cosponsors (3) 
Committees: Senate Finance 
Latest Major Action: 4/24/2013 Referred to Senate committee. Status: Read twice and referred to the Committee on Finance.