Bush's Tax Panel May Review Housing Tax Break

by Leroy Baker, Tax-News.com, New York

26 August 2005

US house prices have risen 69% in eight years, boosted by tax breaks and low interest rates, and a Mortgage Bankers Association (MBA) study issued this week is reassuring about the property 'bubble'; but President Bush's Advisory Panel on Federal Tax Reform may want to level the investment playing field.

The MBA study concludes that positive economic fundamentals including low mortgage rates at the national level and strong employment growth rates at the local level can explain much of the recent increase in house prices and much of the differentials in appreciation rates across the country.

Tax, or the lack of it, is however a factor. In 1997, Congress allowed homeowners to exclude up to US$500,000 in gains when they sell homes they occupy, and eliminated 'roll-over' rules requiring sellers to buy more expensive homes to avoid taxes. Tax rates prior to 1997 could run as high as 39.6%. Taxes on the sale of homes that are not a primary residence have been reduced twice since 1997 to rates as low as 5%.

The Advisory Panel, which is headed by former senators Connie Mack and John Breaux and is due to report to President George W. Bush by September 30, is studying options to lower taxes on many types of investments to meet Mr Bush's goal of spurring savings and economic growth. Changes to housing-related tax incentives would also be considered, said Jeffrey Kupfer, the panel's staff director.

In contrast to housing, income from other forms of domestic investment is taxed at higher rates: investment interest is taxed at up to 35%, and the rate on dividends was the same until it was reduced in 2003 to 15%.

The panel has said little so far about its conclusions, although in July it called for the elimination of the Alternative Minimum Tax system. "The panel has come to the consensus that we ought to repeal the AMT," panel chairman, former Senator for Florida Connie Mack told reporters.

However, Mack conceded that the panel as yet has no clear idea on how to replace the $1.2 trillion in tax revenues that the AMT will bring in over the next ten years. Also, panel vice chairman, former Senator John Breaux (D - La) suggested that some form of alternative system must exist in the tax code to ensure that the wealthy can not get away with paying little or no tax.

The commission members also indicated their preference for removing the minimum corporate tax as part of a broader overhaul of the corporate tax system, although it appears that no decisions have been made beyond repeal of the individual AMT.

Mack has set five goals for the panel when it reports its recommendations at the end of September, including: simplifying tax filing procedures; promoting fairness and removing tax gimmicks; scrapping inefficient tax breaks and loopholes designed for special interests; encouraging savings and; removing barriers to competitiveness in American business.

The tax panel may be tempted to recommend a reduction in housing's relative advantage. Members of the Panel said at hearings that they were considering a wide range of ways to stimulate savings. The options range from cutting rates on dividends, interest and capital gains to streamlining tax-free savings mechanisms for retirement, education and health care.

However, the President, in his instructions to the tax panel, said that it should "recognise the importance of home ownership" in considering what changes to recommend. And given the importance of the housing sector to so many business interests and investors, it seems very unlikely that Congress would contemplate any major worsening in the regime for housing investment.

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