The Senate Finance Committee held a hearing on October 6 to consider tax expenditures that subsidize homeownership. The hearing was called by Finance Committee Chairman Max Baucus (D-MT) as part of a series of hearings on ways to reform the tax code. Chairman Baucus said that “as we reduce the deficit, we need to ensure that every dollar in tax expenditures is spent wisely and spent efficiently.” 

The first witness was former Senator John Breaux (D-LA), who co-chaired President Bush’s 2005 Advisory Panel on Federal Tax Reform. Among its many recommendations for tax reform, that panel recommended eliminating the mortgage interest deduction (MID) on second homes and home equity loans, lowering the amount of interest that can be deducted from $1 million to an amount based on local housing costs with a maximum of $412,000, and converting the MID to a 15% tax credit. He cited data from the Panel’s research that the MID benefited a minority of higher income tax payers. The Panel also recommended repeal of the deduction of state and local taxes, including property taxes, and lengthening the time that a house must be used as a personal residence before being eligible for the capital gains exclusion.  Senator Breaux urged the committee to undertake fundamental tax reform as soon as possible.

Two witnesses represented the home building industry and urged protection of the current home ownership subsidies. Dr. Robert Dietz, an economist with the National Association of Home Builders, testified about the benefits of home ownership and defended its favored tax status. He countered claims that the MID is regressive and asserted that most people who own homes get the tax break. He also presented arguments in favor of the deduction for second homes and home equity loans. The major argument against changes to the tax status of home ownership is that it would cause further decline in home values.

The second witness to defend the MID was Gregory Nelson, Vice President of the PulteGroup, which he described as one of the nation’s largest homebuilders. He said that eliminating the MID would cause many prospective home buyers to drop out of the market, which could cause a double dip recession. It would also constitute a tax increase on middle class homeowners who he says pay over 80% of the federal income tax.

Two academic economists spoke in favor of reform of the MID, although both stressed that no changes should be made until the housing market has stabilized and housing prices have stopped falling. Dr. Karl “Chip” Case, co-author of the Case-Shiller Home Price Index and Professor Emeritus of Wellesley College, does not recommend stand-alone changes to home owner subsidies, but rather would like to see such changes in the context of overall tax reform. He explained the exclusion of imputed rent as the most expensive home owner tax subsidy and said his first preference for reform would be to tax imputed rent, but acknowledged this was a “non-starter.” His second choice for reform would be to phase out the MID and the property tax deduction; an alternative would be to convert the deduction to a credit.

Dr. Richard Green, the Lusk Chair in Real Estate at the University of Southern California, commented that he had been arguing for reform of the MID for 21 years and this was the first time he had a sense that it might actually happen. He said the MID is “a residual of the 1913 tax code, accomplishes little that its supporters claim for it, pushes capital away from plant and equipment toward housing, and benefits high income (although perhaps not very high income) households more than the remainder of the country.” If the federal government wants to support home ownership through the tax code, he favors a targeted, refundable credit.

Questions from Senators following the testimony focused on the MID, the degree to which its value was embedded in house prices, and the consequences to economy of phasing it out or changing it. Senator Charles Grassley (R-IA) asked about home ownership rates and the tax treatment of housing in other countries compared to the United States. Both Dr. Case and Dr. Green said that variations in monetary policy, forms of tenure, and the status of renters across other countries made as much difference in home ownership rates as did tax policy.

The National Housing Trust Fund Campaign will submit testimony for the record to the Senate Finance Committee this week on the tax treatment of home ownership, with recommendations for reform. The campaign supports reform of the MID and directing all or some of the savings to the National Housing Trust Fund. The campaign sent a letter to Senator Baucus on August 26 in his role as a member of the Super Committee urging him to direct savings from reform of the MID that the committee may be considering.

To read the testimony of the witnesses at the October 6 hearing or view the hearing in its entirety, go to http://finance.senate.gov/hearings/hearing/?id=279c1381-5056-a032-5260-1ce326dfc82b.

To read the NHTF Campaign’s letter to Senator Baucus and the other members of the Super Committee, go to www.nhtf.org