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Tax System Reform Turns Home Owners Into Losers
 Following is a letter to the editors of the Wall Street Journal.
What looks like “A Golden Opportunity” (editorial page, Nov. 1) for the nation’s economy to Professors Edward P. Lazear and James M. Poterba, both members of the President’s Advisory Panel on Federal Tax Reform, resembles something alarmingly different for the 37 million Americans who saved $70 billion on their taxes in 2004 by taking the mortgage interest deduction and the 42 million who cut another $45 billion from their taxes by itemizing state and local taxes, including those on sales and personal property. By seriously paring back the former deduction and eliminating the latter, the proposed tax plan that was plunked on the Treasury secretary’s desk this week may promise “a collection of provisions that leave most families in a position not very different from their current one,” but in reality would deliver a crippling blow to America’s home owners and the long-standing commitment of our federal government to housing.
Radically undermining the current tax system’s support for housing would not only increase the monthly cost of owning a home, it would reduce housing demand; trigger a slide in home values and a surge in mortgage defaults; and erode the equity that families have been using to send their children to college, defray medical expenses, and improve or repair their homes. Incidentally, in California, Florida, the East Coast and other high-priced housing markets, households aren’t buying more expensive houses because of the mortgage interest “tax subsidy.” An inadequate supply of homes in these areas — aggravated by land shortages and government regulation — has driven prices up far beyond what would be allowed in the reform plan. These are the places where the current mortgage deduction can truly be a lifesaver for families struggling to afford to buy a home.
And the proposal would inflict even more damage. By wiping out the deduction for interest on second homes and vacation properties, the proposed plan would wallop resort areas; and by jettisoning the Low Income Housing Tax Credit it would eliminate the single greatest catalyst for affordable housing development in existence today. Worst of all, the plan would have a seismic impact on the housing sector, which, let’s not forget, led growth and created jobs through the early years of this decade when most businesses were sputtering. If the primary goal of a tax system is promoting economic growth, then why would you want to divert support away from an industry that accounts for 16% of the nation’s Gross Domestic Product?
In their Utopian zeal to create the perfect tax system, the professors warn that tax reform will fail if politicians begin dissecting the impact of individual provisions on their constituents. It is baffling that they would expect otherwise. This is tantamount to the Wizard of Oz telling Dorothy not to look behind the curtain.
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