Proposals to scale back on the mortgage interest deduction and other housing tax provisions included in a discussion draft from President Obama's bipartisan Commission on Fiscal Responsibility and Reform released on Nov. 10 have raised serious concerns for the nation’s home builders.

Specifically, the draft report by co-chairs Erskine Bowles and former Senator Alan Simpson lists options to completely eliminate the mortgage interest deduction or limit it to primary residences and mortgages under $500,000.

Other proposals would be adverse for the Low Income Housing Tax Credit (LIHTC), the deduction for real estate taxes for home owners, accelerated depreciation for rental housing, energy tax incentives and tax-exempt housing bonds. In addition, the proposals would result in significantly higher tax rates for capital gains and dividends. 

However, none of these proposals has been formalized, and they are only listed as potential "options." Moreover, the overall plan, which includes many controversial proposals on Social Security, health care, defense spending and other issues, must win support of 14 of the 18 commissioners in order for Congress to consider the package. This is a high hurdle and requires the support of both Republican and Democratic members of the commission.

The commission itself has no actual power to implement its official recommendations and many of the proposals put forth by the chairmen are unlikely to garner bipartisan support.

Reactions to the plan from both sides of the political aisle have varied, ranging from outright opposition to cautious interest.

Nevertheless, this is the first concrete evidence put forth that the commission is taking a close look at the mortgage interest deduction and other housing incentives with an eye to scaling them back. 

On the day that the draft report was released, NAHB immediately posted a reaction statement by Chairman Bob Jones, expressing the association’s deep concerns about the mortgage interest deduction proposals. NAHB also took advantage of social media channels to get the word out to consumers via a new mortgage interest deduction Facebook page at facebook.com/SaveMyMID and a new Twitter feed located at Twitter.com/SaveMyMID.

All NAHB members who are concerned about this critical issue are encouraged to visit these pages and alert their family members and friends to visit them as well. 

Going forward, NAHB stands poised to vigorously defend the mortgage interest deduction and other critical housing and business provisions in the tax code as events unfold.

The NAHB Board of Directors has allocated resources to fight the anticipated assault on the mortgage interest deduction, and an integrated advocacy campaign is being developed in preparation for the fiscal commission's final report to be released in December.  

Along these lines, in the near future NAHB will introduce a new website that will provide essential data on the mortgage interest deduction and its importance to American consumers, and will facilitate member and consumer outreach to legislators.

Following is a summary of the co-chair’s draft proposal:

Tax Reform

• Proposes to simplify the tax code, broaden the base, lower rates, bring down the deficit and cap revenue at 21% of the gross domestic product (GDP).
  
  
• Abolishes the alternative minimum tax.
  
  
• Would create three individual rates and one corporate rate.
  
  
• Calls upon Congress to enact reform by the end of 2012 or, if there is no reform, to put in place an across-the-board “haircut” for itemized deductions, employer health exclusion and general business credits that would take effect in 2013. The haircut would limit the proportion of deductions and exclusions to around 85% of the current amount, lowering it annually until reform takes place.

Option 1: The Zero Plan

• Eliminates all tax expenditures (which includes the mortgage interest deduction, property taxes, low-income housing tax credit, etc.), sets aside $80 billion for deficit reduction and treats capital gains and dividends as ordinary income. The plan then lays out multiple options for how much the tax rates would need to increase to pay for numerous popular tax expenditures, including the mortgage interest deduction.
  
  
• Base rates — with all deductions and credits eliminated — are 8%, 14% and 23% for individuals, and 26% for corporations.
  
  
• The proposal then maps out a series of alternatives with certain tax expenditures brought back into the mix.
  
  
• Alternative Option, 80%: If you keep the child tax credit and the earned income tax credit; “reform” the mortgage interest deduction and health and retirement benefits at 80% of their current level (although it is unclear what 80% means); and switch to a territorial system (impacting multi-national corporations), rates would need to increase to: 12%, 20% and 27% for individuals, and 27% for corporations.
  
  
• Alternative Option, 100%: If those same expenditures are kept at current levels (100%), rates would need to be 13%, 21% and 28% for individuals, and 28% for corporations.

Note: under the scenarios in which all tax expenditures are cut or subject to a haircut, this would include other items, such as: the 27.5-year depreciation period for rental housing (which would jump to 39 years), tax-exempt multifamily bonds, mortgage revenue bonds and energy tax incentives, among others.

Option 2: Wyden-Gregg Style Reform

• Repeal alternative minimum tax.
  
  
• Establish three rates: 15%, 25% and 35%.
  
  
• Triple the standard deduction to $30,000 ($15,000 for individuals).
  
  
• Repeal state and local tax deductions, cafeteria plans and miscellaneous itemized deductions.
  
  
• Limit the mortgage interest deduction to primary residences only, mortgages under $500,000 (eliminating second homes and home equity).
  
  
• Reduce the corporate rate to 26%.
  
  
• Repeal “other” non-specified tax expenditures (could include the LIHTC).

Spending Cuts

• Spending cuts would start in 2012, including defense and entitlement spending.
  
  
• Reduces spending to 22%, then 21% of GDP (historically we’ve been at 18%, so if you keep spending that high, that impacts the tax debate).
  
  
• $4 trillion in deficit reduction through 2020.
  
  
• Reduces the deficit to 2.2% of GDP by 2015.
  
  
• Reduces debt to 60% of GDP by 2024 and 40% by 2037.
  
  
• Ensures lasting solvency of Social Security.
  
  
• Would reduce discretionary spending in FY2012 to FY2010 levels (some Republicans have already targeted FY2008 levels) and requires a 1% cut in discretionary budget authority every year from FY2013-2015. From FY2015-2020, discretionary budget authority spending would be indexed to inflation.
  
  
• Notable Recommendations:
  
  
  • Recommends malpractice reform as part of a permanent “doc fix” (will be a problem for many Democrats).
    
    
  • Moves the Transportation Trust Fund to a mandatory program but limits transportation spending to revenue collection — with a prohibition on using general fund money for the trust fund.
    
    
  • Increases gas tax by 15 cents beginning in 2013.
    
    
  • Calls for comprehensive Social Security reform, including a special minimum benefit for low-income workers and a benefit boost to older retirees at risk of outliving their other retirement resources. The retirement age would be indexed to increases in longevity, benefits for higher income retirees would be reduced, all new state and local employees would be included in the system and the amount of income subjected to Social Security taxes would be increased.

For more information on the President’s deficit commission, e-mail J.P. Delmore at NAHB, or call him at 800-368-5242 x8412.