US Senate Releases Paper On Housing Tax Reform Options
20 May 2013
Posted by: Author: Mike Godfrey
Source: Mike Godfrey (Tax-News.com, Washington)
The Senate Finance Committee has released its sixth paper, on "Economic and Community Development", which includes housing and mortgage tax incentives, in a series compiling tax reform options that the Committee's members may wish to consider as they work towards reforming the United States tax system.
The options described in the paper, as in the previous papers, represent a non-exhaustive, sometimes contradictory, list of prominent tax reform options suggested by witnesses at the Committee's 30 hearings on tax reform to date, bipartisan commissions, tax policy experts, and members of Congress. It is stressed that the options included are not necessarily endorsed by either the Committee's Chairman Max Baucus (D – Montana) or Ranking Member Orrin Hatch (R – Utah).
The paper points out that there is some concern that tax expenditures for homeownership are inequitable because higher-income households receive larger tax incentives than lower-income households. More than two-thirds of taxpayers (generally of middle- and low-incomes) do not itemize and therefore do not benefit from the mortgage interest deduction (MID).
However, apart from the MID, and a temporary provision, scheduled to expire at the end of 2013, to allow some taxpayers to claim a deduction for mortgage insurance premiums, the federal tax code also provides for the low-income housing tax credit (LIHTC) and tax-exempt bond financing for affordable rental housing.
Others warn that, over the last 40 years, inflation-adjusted, per-capita mortgage debt has more than doubled, and are concerned that tax expenditures for homeownership have contributed to this increase and that households are less financially stable as a result.
The paper lists reform options for the three major tax expenditures for homeowners: the MID, the exclusion from the tax base of capital gain on the sale of a home, and the deduction for property taxes.
The MID could be repealed, phased out or limited by reducing the maximum mortgage eligible for the deduction by, for example, USD100,000 for each of 10 years (estimated in 2011 to raise USD215bn over 10 years); or by limiting the value of the deduction to, for example, 28 percent per dollar deducted, as contained in the Administration's 2014 fiscal year budget.
Being, perhaps, phased in over a number of year, the deduction could also be converted into a tax credit, which could be a percentage of mortgage interest or could be a flat dollar amount; could be refundable or nonrefundable, or could be limited only to first-time homeowners.
With regard to the exclusion of the capital gain on the sale of a principal residence, the varied options suggested include its phasing out over, for example, 10 years; or the taxpayer could be allowed to spread the gain over, for example, 5 years. Furthermore, the deduction for mortgage insurance premium payments could be made permanent.
It is also noted that, while some have proposed the repeal the LIHTC (including the President's Economic Recovery Advisory Board in 2010), others would expand it or replace it with an equivalent reduction in tax on rental income.