House Hearing on Real Estate Tax Reform; Representative Ellison Issues New Dear Colleague Letter

The House Committee on Ways and Means held a hearing entitled “Tax Reform and Residential Real Estate” on April 25. The focus of the hearing was to “consider how certain Federal tax provisions affect the housing sector and homeownership – and the benefits of such investment. It will explore how tax policy affects the relative level of investment between residential real estate and other parts of the economy (such as business investment). Committee Chair Dave Camp (R-MI) opened the hearing by saying, “my position on the tax code is well known... complexity plagues the entire code and underscores one simple fact: the tax code is a mess.” Under his leadership, the Ways and Means Committee is engaged in a major examination of the tax code with the intention of producing a proposal for comprehensive tax reform. A primary objective of such tax reform would be to lower both corporate and individual tax rates, offset by the elimination or reform of many federal tax expenditures, popularly known as tax breaks. While the written testimony covered the full range of real estate related tax provisions, the oral testimony and questions centered on the mortgage interest tax deduction (MID) and the low income housing tax credit.Witnesses who testified in favor of the reform of the MID were: Eric Toder, Co-Director of the Urban-Brookings Tax Policy Center; Mark Calabria, Director of Financial Regulation Studies of the Cato Institute; and Phillip Swagel, Professor of International Economic Policy at the University of Maryland School of Public Policy. Witnesses who opposed changes to the MID were Gary Thomas, President of the National Association of Realtors, and Robert Dietz, Assistant Vice President for Tax and Policy Issues of the National Association of Home Builders.Mr. Toder argued that the MID favors homeownership over rental housing, higher income people who would be homeowners anyway, and investment in housing over other businesses. He argued that if the purpose of the MID is to promote homeownership, it should be restructured to benefit low and middle income taxpayers. He strongly recommends converting the deduction to a credit and lowering the cap on amount of debt eligible for the subsidy.Mr. Calabria recommends eliminating the MID and the deduction for local property taxes entirely over a period of seven years. He would also not tax rental income so as to make tax policy tenure neutral. He presented the full range of economic and policy arguments for why the MID is a poorly structured provision of the tax code.Mr. Swagel states that the MID incentivizes bigger houses and more debt. “By providing a subsidy to use debt through the deductibility of mortgage interest payments, the tax code gives an incentive for the overuse of leverage in the form of mortgage borrowing. The tax benefit from the home mortgage interest deduction rises with the amount of debt financed: the more debt, the greater the tax benefit.” He recommends converting the deduction to a credit, so that everyone gets the same percentage tax break, and lowering the amount of mortgage debt for which one can get a tax break.Mr. Thomas and Mr. Dietz defended the status quo and argued against any changes to the MID. Much of their defense centers around who benefits from the MID. While pro- and anti-MID reform advocates often cite the same figures, they differ on what income categories mean. The housing industry tends to focus on all homeowners with incomes under $200,000, which includes most homeowners, while others divide homeowners into more discrete subgroups for analysis.Much of the debate and questioning centered on the possibility of eliminating the MID and members on both sides of the aisle expressed considerable concern. Representative Lynn Jenkins (R-KS) asked specific questions about proposals to reform, but not eliminate, the MID and said that the general consensus among economists is that it would be better to replace the current deduction with a credit. Representative Tim Griffin (R-AR) asked Mr. Thomas his opinion on converting the MID to a credit. Mr. Griffin responded that the proposed 15% credit was so low that for households in tax brackets above 15%, the conversion from a deduction to a credit would result in increased taxes for some households.Chair Camp asked Robert Moss of Boston Capital whether LIHTC resources should instead go to individuals instead of developers of affordable housing. Mr. Moss said that many LIHTC projects are deeply targeted and serving people at 40 or 30% of area median income (AMI), though he did not elaborate how these goals are being met. Later, in response to a question from Mr. McDermott about what the most effective housing program for Congress to fund is, Mr. Moss added that LIHTC is a “very, very flexible program” and can be used to build housing for people with disabilities, veterans, and other special populations. Mr. McDermott remarked that Mr. Moss had not mentioned Section 8. Mr. Moss responded that LIHTC is a better option because it is a public private-partnership, to which Mr. McDermott noted that the private sector is also a key player with Section 8. Representative Pat Tiberi (R-OH) spoke highly of the LIHTC program, saying, “if you wanted to build housing for low income people in my district, if you looked at HUD, Section 8, and LIHTC, there is no comparison of what is the best housing for low income individuals.” Representative Danny Davis (D-IL) raised the National Housing Trust Fund during the first panel in the hearing, drawing attention to the fact that the hearing was largely focused on the needs of homeowners and not the shortage of housing affordable and available to extremely low income households. Mr. Davis said that the Committee should consider proposals such as the NHTF and a renter tax credit, in addition to the other topics of discussion at the hearing.The Committee concluded the hearing without announcing concrete next steps, although Chair Camp and retiring Senate Committee on Finance Chair Max Baucus (D-MT) continue to publicly state their intention to move forward on comprehensive tax reform during the 113th Congress. NLIHC submitted comments for the hearing record making the case for the MID to be modernized to raise revenue to fund the National Housing Trust Fund. The recommended changes to the MID are: lower the cap on the amount of mortgage interest for which a household can get a tax break from $1 million plus $100,000 in home equity loans to $500,000, and convert the deduction to a 15% non-refundable credit.These two changes, phased in over five years, would raise $197 billion in ten years. These changes to the MID are included in the United for Homes proposal, as well as in H.R. 1213, the Common Sense Housing Investment Act, which was introduced by Representative Keith Ellison (D-MN) in March. NLIHC President and CEO Sheila Crowley said in the comments, “Congress has a unique opportunity to modify the mortgage interest deduction through comprehensive tax reform to ensure that more homeowners receive a benefit for interest paid on their mortgages and to distribute federal investments in housing to more accurately reach where resources are needed.”Following the hearing, Mr. Ellison circulated a “Dear Colleague” letter urging members to cosponsor H.R. 1213, and cited the testimony of Mr. Calabria, Mr. Swagel, and Mr. Toder, which made the case for a modernization of the mortgage interest deduction. Read the Dear Colleague letter at http://bit.ly/10Obp9S. View all witness testimony at http://1.usa.gov/14BXkOc.View an archived webcast of the hearing at http://bit.ly/15PlXqq. Read NLIHC’s comments at http://bit.ly/17oXPZE.