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Tax Panel Eyes the Perfect Man-Made Storm
 In recent weeks, while the attention of the nation has been largely diverted by reconstruction efforts along the Gulf Coast, a storm of disturbing proportions has been quietly brewing in Washington, D.C., as nine presidential appointees from Congress, business and academia have been honing in on income tax reform proposals that would pound housing about as severely as Hurricane Katrina battered New Orleans and Biloxi. If this man-made cataclysm does eventually make landfall, immediate casualties will include the more than 74 million households who own their homes, and housing may never recover as the force it is today in the American economy.
A typical home owner doesn’t need a pencil to estimate the fallout from recommendations from the President’s Advisory Panel on Federal Tax Reform that are due on the Treasury secretary’s desk on Nov. 1. Just consider what April 15 would look like if you could no longer take full advantage of your tax deduction for mortgage interest and you lost your deductions for local and state taxes, including property taxes, and for interest on home equity loans. It wouldn’t be a pretty picture, but those are among the provisions that are expected to emerge from the panel, which for some inexplicable reason apparently believes that Americans are prepared to pay a heavy price for the simplification that its radical overhaul of our tax system is supposed to achieve.
The panel is expected to propose replacing the mortgage interest deduction with a tax credit for 15% of the interest on loan amounts up to the ceilings for FHA loans, which range from roughly $172,000 up to $312,000 for high-cost areas. Among those who will feel the full brunt of this change will be home owners and buyers in the highest-priced markets of California and other parts of the country, where the price of a relatively modest house can easily approach an amount that is double the top FHA limit. This could be the final blow for middle-income households who have relied upon current tax policy to push them over an affordability gap that has been widening at an alarming rate.
It is disturbing that an advisory panel chartered to “promote long-run economic growth and job creation, and better encourage work effort, saving and investment” is oblivious to the consequences of dismantling tax policies that have provided a solid foundation for homeownership and doesn’t seem to be much concerned about what happens when that foundation is gone.
Housing sustained the American economy through the relatively mild recession early in this decade and led growth during the recovery period, churning out new jobs when job creation from most businesses and industries remained stubbornly at a trickle. Housing accounts today for 16% of growth in the Gross Domestic Product. At a time when energy prices are soaring, the Federal Reserve is pushing up interest rates to keep a rein on inflation, workers are seeing a decline in their real wages and consumers are becoming more subdued in their spending, does it really make sense to pursue policies that are sure to erode housing values, dampen housing sales and set the industry spinning downward?
About half of the wealth of the nation’s home owners is tied up in the homes they own. Significantly more families own housing than stocks. And out of their vast stores of equity families are finding the means to pay for their children’s college educations, cope with high medical expenditures, repair and update their homes and defray other expenses. Is it worth jeopardizing the investment that tax payers have made in their housing so that it will be easier for them to fill out their tax forms?
Ironically, the tax panelists also want to wipe out the low-income housing tax credit, which is shaping up as a valuable tool for rebuilding from the rubble left by Katrina. The low-income housing tax credit is one of the only tools available to construct affordable rental housing. About 135,000 new and rehabilitated apartment units are made available to low-income families under the tax credit program every year.
Fortunately, for the time being, the blueprint for man-made destruction unfolding in Washington is more a source of concern than an outright menace. Unleashing the full fury of this anti-housing plan will require the concurrence of both Congress and the President. It can only be hoped that they will exercise common sense in rejecting this disastrous approach, an option that is not available to Mother Nature.
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