As Members of Congress, fresh out of the woodshed they were taken to when they went back to visit constituents during the Easter break, move forward with a new housing relief plan, the New York Times Economic Scene columnist David Leonhardt takes a look at a previous attempt to address housing issues, specifically residential tax breaks.
One of the Panel's key, and most controversial, suggestions was to replace the mortgage interest deduction with a tax credit. The Panel provided several reasons for the change, the prime one
being that a credit would still benefit homeowners but be fairer.
Many low- and middle-income families, noted the Panel, don't benefit from the deduction because they don't itemize, so the mortgage interest tax break essentially subsidizes wealthier taxpayers who don't need as much help, tax or otherwise, to get into their own homes.
When the Panel's report was issued in November 2005, I was among those
cynical realistic enough to know it was going nowhere fast (and said so in this posting). Part of the reason for my (and others') prediction that the report was DOA was the sacrosanct mortgage interest deduction proposal.
And Dubya, the man who asked for the tax overhaul analysis in the first place, sounded the Panel report's official death knell a month later (noted in this posting), by quietly burying the suggestions.
Mortgage interest debate: But discussion of the mortgage interest issue has continued.
In March 2006, financial journalist Roger Lowenstein noted that "… the tax break isn't even doing a lot of mortgage-interest paying homeowners much tax good." (My blog post on Lowenstein's article can be found here.)
And today, Leonhardt writes:
… [T]he people who created the current tax code -- in the White House and in Congress, both Democrat and Republican -- deserve some blame, too. They have built a system that treats home purchases more favorably than just about any other form of investment.
The biggest of the government's real estate subsidies is the well-known and well-loved mortgage-interest deduction. It allows people to avoid taxes on any income that is used to pay interest on mortgages, whether the mortgage is for a primary residence or a vacation home, up to $1 million in combined loan value. "Effectively," said Charles Rossotti, an I.R.S. commissioner under President Bill Clinton who served on the tax panel, "it encourages people to overinvest in housing."
Leonhardt also notes, as many others have, how this tax break favors only those who itemize, i.e., the more well-to-do taxpayers.
And he points out the distinct advantage the primary residence sale tax exclusion gives to money put into personal real estate vs. other types of investment:
There's just no reason the government should be encouraging people to invest a spare $100,000 in a bigger house rather than, say, in the stock market, where a company might be able to put the capital to more productive use.
Winners, losers, timing: The hubby and I are homeowners. We don't consider ourselves wealthy, but we've always been able to claim the mortgage interest deduction and we will continue to do so as long as it's available.
And in past home sales, we've been able to make good use of the tax exclusion. In fact, we just used some of the nontaxed money we took away from our Florida residential sale three years ago to totally redo the backyard of our Texas home.
Those who point out the problems with these residential tax breaks have some basis for their objections. But the difficulty in making any sweeping changes, both politically and economically, is that the hubby and I have lots of housing peers.
While there are some folks who abused the system, sequentially flipping homes simply to make money on the price appreciation or getting oversized mortgages because they could deduct the interest, a lot of us have lived within our means, purchased our homes as places to live not as investments, and are very grateful for the tax help we get from our abodes every April.
I'll guarantee you that if Washington, D.C., ever gets around to actually making any sweeping changes to the current home-related tax breaks, we'll be making as much noise then as struggling homeowners are now.