House Ways and Means Committee Chair Dave Camp (R-MI) recommends reducing the cap for the mortgage interest deduction (MID) in his proposed “Tax Reform Act of 2014,” which was released on February 26. Today, tax itemizers can deduct interest paid on mortgages of up to $1 million from their taxes. Mr. Camp would lower it to $500,000. “Mr. Camp’s willingness to change the mortgage interest deduction indicates that it is no longer the untouchable third rail of tax policy and is ripening for reform,” said NLIHC President and CEO Sheila Crowley in a February 26 statement.
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.
According to Ways and Means Committee materials, “The provision would preserve a substantial tax benefit for homeownership without affecting most taxpayers, who either do not itemize their deductions or who live in moderately priced housing markets.”
Mr. Camp would also increase the standard deduction, and thus predicts that “far fewer taxpayers” compared to today would be impacted by the MID cap reduction. Under his plan, 95% of taxpayers would find “they are better off by taking advantage of the larger, simpler standard deduction instead,” according to the discussion draft summary. “By reducing the current-law $1 million limitation, the provision would more effectively promote homeownership, rather than also promoting leveraged purchases of larger homes than taxpayers otherwise would acquire without the tax benefit,” the summary says.
The proposal’s summary also dismisses arguments that altering the MID is harmful to the housing market. “Indeed, 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,” it says.
The United for Homes campaign proposes modifying the MID by decreasing the cap to $500,000 and converting the deduction to a 15% non-refundable credit. Unlike the United for Homes campaign proposal which would direct the revenue generated through those modifications to fund the National Housing Trust Fund, Mr. Camp’s proposal would direct revenue generated to lowering individual tax rates. The United for Homes proposal is reflected in H.R. 1213, the Common Sense Housing Investment Act of 2013.
The Camp proposal would maintain the Low Income Housing Tax Credit, but would eliminate the 4% credit and tax-exempt bonds, key tools for affordable housing preservation and development. He also would spread the housing tax credit over a 15-year period, versus the 10-year period today, pushing a third of the program’s cost into the next 10-year federal budget window. This lowers the federal tax expenditure on paper, but lengthens by five years the time it would take for LIHTC investors to realize the full tax benefit.
Other proposed changes to the LIHTC would be to eliminate the current up-to-30% boost to eligible basis for the amount of tax credits that go into a development in a difficult-to-develop or high cost area, and to eliminate any preferences for artists in housing credit developments, while allowing preferences only for special needs households and veterans.
Affordable Rental Housing ACTION, the group that has been working to ensure the LIHTC survives any broad tax reform plans, issued a statement on the draft Tax Reform Act of 2014 on February 26. “While we are very pleased with the Chairman’s support for the Housing Credit, the draft has proposed some key changes that will in some instances make building and preserving affordable housing more difficult or impossible to accomplish. In addition, we are deeply concerned that the discussion draft would eliminate the ability of states and localities to issue tax-exempt private activity bonds to finance affordable housing. Tax-exempt Housing Bonds support the financing of 40 percent of all Housing Credit development annually and are often essential to the preservation of affordable housing.”
The proposal would also reduce Earned Income Tax Credits for working poor households, a cut that the Center on Budget and Policy Priorities estimates would cost a working mother earning $14,500 a year with two children about $2,000 when the plan is fully in effect in 2018, even with the plan’s proposed increases to the Child Tax Credit for working households.
“Dead on arrival” is the ubiquitous status report for Chair Camp’s plan. However, it does lay the groundwork for when Congress does decide to take up tax reform.
View House Ways and Means Committee’s Tax Reform Act of 2014 documents at: http://tax.house.gov/
Read NLIHC President Sheila Crowley’s February 26 statement at: http://nlihc.org/press/releases/4087
Read about H.R. 1213 at: http://nlihc.org/unitedforhomes/legislation
Read the ACTION campaign’s February 26 statement at: http://bit.ly/1mDk6ua