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US Congress Studies Residential Property Tax Reform

by Mike Godfrey,, Washington

30 April 2013

Dave Camp (R – Michigan), Chairman of the House of Representatives Committee on Ways and Means, has held a hearing on the United States federal tax provisions that affect residential real estate, as part of the Committee's continuing work on tax reform.

In addition to the exclusion of gain on the sale of a principal residence and the low-income housing tax credit, a number of different federal tax provisions directly affect residential real estate and the housing sector. For example, the mortgage interest deduction (MID) and the deduction for state and local real property taxes are available to the roughly one-third of taxpayers who itemize their deductions, but not to the roughly two-thirds of taxpayers who instead take the standard deduction.

For some taxpayers, however, these deductions are reduced by the recently-reinstated "Pease" limitation on itemized deductions, and the real property tax deduction is completely disallowed for taxpayers subject to the Alternative Minimum Tax.

In his opening statement Camp noted that "homeownership is an integral part of the ‘American dream’, and the US 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."

Furthermore, there are complexities within the different rules and criteria for each of the federal tax preferences providing benefits for residential real estate homeowners, who are also treated differently from renters. "A taxpayer who pays USD1,000 per month to rent an apartment may not deduct that amount from income," he pointed out, "but a taxpayer who pays mortgage interest of USD1,000 may take a deduction if they itemize."

Nevertheless, Camp was at pains to point out that "not every credit or deduction is a loophole. The largest investment most people have is their home and policies like the MID have played a big role in home ownership."

The Committee's Ranking Member Sander Levin (D – Michigan), in his statement, reemphasized that view, stressing that "the main provisions incentivizing home ownership are policies, not loopholes. … According to the Joint Committee on Taxation (JCT), 70% of the benefit of the MID goes to households earning less than USD200,000 a year. Less than a third of the benefit therefore goes to those who make more than that."

On the other hand, Eric J. Toder, co-director of Urban-Brookings Tax Policy Center, commented that, as the MID is one of the largest tax subsidies in the US tax code, reducing federal receipts by about USD70bn in 2013 and by about USD380bn between 2013 and 2017 (again according to the JCT), "achieving a revenue-neutral tax reform that reduces marginal tax rates significantly would be difficult or impossible to achieve without cutting back the MID or some other equally popular and widely used provisions."

He thought that, among income tax incentives, "the MID is one of the most difficult to justify on policy grounds. Both theory and available evidence suggests it does little to encourage home ownership, but instead mostly encourages upper-middle-households to buy larger and more expensive homes."

"It would be possible," Toder concluded, "to provide a larger incentive for home ownership at a lower fiscal cost by converting the deduction to some form of uniform credit and placing additional limits on the amount of debt eligible for the subsidy and the use of the subsidy for home equity loans and second homes. Bipartisan tax reform and debt reduction commissions have endorsed this type of approach."

However, he also stressed that any such reform should "take account of possible short-run adverse effects on housing markets. Designing appropriate transition rules that prevent market disruption while retaining the benefits of removing or redirecting the preference will be challenging."

TAGS: tax | property tax | tax incentives | real-estate | tax credits | tax rates | United States | tax breaks | tax reform | individual income tax

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