On December 11, House Ways and Means Committee Chair David Camp (R-MI) introduced the Tax Reform Act of 2014 (H.R. 1). His bill would amend the mortgage interest deduction (MID) by capping the size of a mortgage for which a taxpayer can deduct the interest at $500,000. The current cap is $1 million. The reduction to the MID cap proposed by Chair Camp would be phased-in over four years, becoming $500,000 in 2018 and would only be applied to new mortgage debt. The tax reform proposal would also eliminate the deduction of interest paid on home equity loans.
H.R.1 is the comprehensive tax reform legislation that Mr. Camp has been working on throughout the 113th Congress. He circulated a discussion draft in February (Memo 2/28) , but did not introduce it at that time. The conventional wisdom was that House leadership discouraged Mr. Camp from introducing the bill prior the November 2014 election, because it is far-reaching and controversial.
Mr. Camp is retiring at the end of the 113th Congress. Representative Paul Ryan (R-WI) will chair the Ways and Means Committee in the 114th Congress. Mr. Ryan is expected to craft his own approach to tax reform.
Nonetheless, Mr. Camp has left a marker that makes room for future changes to the MID. He rejected the position that MID reform is harmful to the housing market stating, “historical data show that the strength of the nation’s housing market is tied more closely to the health of the overall economy than to any specific tax policies that may be in place.”
The United for Homes campaign proposes to modify the MID by decreasing the cap on the amount of mortgage interest that is deductible to the first $500,000, and converting the deduction to a 15% non-refundable credit. The new tax revenue generated would be used to fund the National Housing Trust Fund. Unlike the campaign’s proposal, Mr. Camp’s bill would use the new revenue to lower individual tax rates. The United for Homes proposal is reflected in H.R. 1213, the Common Sense Housing Investment Act of 2013, introduced by Representative Keith Ellison (D-MN), see Memo 3/15/13.
Mr. Camp’s bill would also amend the Low Income Housing Tax Credit by eliminating the 4% credit and tax-exempt bonds. The bill would also spread the housing tax credit over a 15-year period, compared to the current 10-year period, lengthening the time it would take for LIHTC investors to realize the full tax benefit. Other proposed changes to the LIHTC would eliminate the 130% basis boost for high cost difficult-to-develop areas (DDA), and occupancy preferences for artists in housing credit developments. Instead, preferences would only be given for special needs households and veterans.
The fact that Mr. Camp’s bill retains the LIHTC, albeit with changes, while he would eliminate numerous other tax breaks, is considered to be a victory for affordable housing advocates.
In addition, the bill would reduce Earned Income Tax Credits available to working poor households. The Center on Budget and Policy Priorities estimates that this cut would cost a working parent with two children earning $14,500 per year about $2,000 when fully implemented by 2018, even with the bill’s proposed increase to the Child Tax Credit for working households.
H.R. 1 is a bill number reserved by the Speaker of the House for a bill he or she considers to be significant. The bill number remained unused until Mr. Camp’s last minute introduction of his bill.
The draft bill and related materials are at http://tax.house.gov