Our Real Estate Blog

Obama's plan to limit write-offs provokes push-back

March 21st, 2009 10:56 AM by Lehel Szucs

Obama's plan to limit write-offs provokes push-back

Seeking revenue in the mortgage interest tax deduction, the president wants to reduce the break for the wealthy.
By Kenneth R. Harney
March 8, 2009
Reporting from Washington -- Call it the third rail of the federal tax system: the politically untouchable cluster of special benefits and subsidies set aside for homeowners, including deductions for mortgage interest and local property taxes along with capital gains exclusions on up to $500,000 in sale profits.

Is the Obama administration serious about beginning to clamp limits on some of these subsidies? The administration isn't commenting on anything beyond what was proposed in its first budget submitted Feb. 26, but housing and banking trade groups are worried that the initial proposal to curb upper-income families' ability to write off mortgage interest and other expenses is just the opening move in a longer-range effort to reform the federal tax code.

* What did the Obama budget propose specifically on mortgage interest and property tax deductions? Starting in 2011, home-owning households with adjusted gross incomes of $250,000 and above could take write-offs only at a 28% marginal tax bracket rate. To illustrate, say you're in the 35% bracket and have $20,000 of mortgage interest, property tax and charitable deductions, all of which are targeted in the Obama proposal.

This year you'd be able to write off 35% of the $20,000 -- $7,000. If you were capped at a 28% rate, you could write off only $5,600. Your tax bill would go up by $1,400.

* Why cut these deductions? Very simply, to raise tax revenue so the government can spend the money elsewhere, such as on healthcare. Mortgage interest and property tax write-offs cost the Treasury massive amounts annually.

In a report in October, the bipartisan congressional Joint Committee on Taxation estimated that in 2009, the mortgage interest deduction alone would cost the government $89.4 billion in uncollected taxes. Between 2008 and 2012, according to the committee, the interest write-off in its current form will cost the Treasury $443.6 billion. Property tax deductions will cost an additional $112 billion over the same period.

* What effect might these -- and possibly further-reaching future changes -- have on the housing market? Home building, realty brokerage and banking industry leaders passionately oppose the deduction cutbacks because they believe they could lower property values and are ill-timed amid the market's vulnerability.

John Courson, president of the Mortgage Bankers Assn., says that even two years in advance of the starting date of the Obama plan, buyers will start "pricing in" the lower tax benefits -- discounting what they are willing to pay for a house given lower future deductions.

Lawrence Yun, chief economist for the National Assn. of Realtors, says the devaluation ripple effect would extend to the lower- and middle-income segments as well. Joe Robson, chairman of the National Assn. of Home Builders, said, "Financing healthcare reforms by chipping away at the mortgage interest and real estate tax deductions . . . will only hurt the ailing housing market and U.S. economy." No trade group has offered specific projections of price or sales reductions attributable to the cutbacks.

* Is there a longer-range plan here? Obama himself has not referred to a broader agenda, but some of his top economic advisors have advocated major reforms of the tax system. For example, his budget director, Peter R. Orszag, is on record favoring scrapping current tax deduction incentives and replacing them with a system of "refundable tax credits." The credits would provide the identical dollar amounts to homeowners at all income and price brackets.

The advantage of a uniform tax credit approach, Orszag argued in a 2006 paper for the Brookings Institution, is that it is usable by low- and high-income taxpayers alike, whether they itemize or not. The credits would be "refundable" in the sense that households that pay little or no income tax could receive them as income supplements.

* Could Congress agree with this year's budget proposals on tax write-offs? Given how deeply rooted the write-offs are in politics and the economy -- plus the fragile state of housing -- the odds would appear to be against it. But Obama is at the height of his game and needs to come up with revenue to pay for healthcare reform from somewhere. So don't count him out.

Posted in:General
Posted by Lehel Szucs on March 21st, 2009 10:56 AM



My Favorite Blogs:

Sites That Link to This Blog: