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Study Analyzes Effect Of US Tax Reforms On Housing Price

Monday, 10 June 2013   (0 Comments)
Posted by: Author: Mike Godfrey
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Author: Mike Godfrey

A new study by Benjamin Harris, senior research associate at the Urban-Brookings Tax Policy Center, has analyzed the effect of possible reforms to United States property tax preferences, and found that any reform that has a likelihood of being considered in Congress will have only a modest impact on housing prices in selected cities.

The study notes that, in the US, homeowners are afforded several generous tax preferences. Mortgage interest and local property taxes are deductible from taxable income, and most capital gains on home sales are exempt from tax. According to the Office of Management and Budget, these tax subsidies will amount to USD151bn in 2013, making tax expenditures for homeownership among the largest itemized deductions in the tax code.

The search for policies to reduce federal budget deficits and to provide the space for a reduction in income tax rates has put all tax preferences, including those for housing, under the microscope.

The study points out that both President Barack Obama's fiscal commission and the Bipartisan Policy Center's Debt Reduction Task Force recommended replacing the mortgage interest deduction with a tax credit for mortgage interest paid and eliminating deductibility of property taxes, while, in his 2014 Budget, the President proposed to limit the tax benefit from itemized deductions and certain other tax preferences – including interest and property taxes paid on mortgages for owner-occupied homes – to 28 percent of the amount of the deductions.

In addition, in 2011, Martin Feldstein, Dan Feenberg and Maya MacGuineas proposed to limit the value of certain tax expenditures (including the mortgage interest and property tax deductions) to 2 percent of taxpayers' income. That plan would sharply curtail the tax benefits of homeownership since additional mortgage interest or property taxes would have no effect on taxable income for homeowners subject to the cap. Mitt Romney, in his presidential campaign, picked up on that but gave no specifics.

In particular, for example, Harris' study finds that President Obama's proposed limitation on itemized deductions would have a minimal impact on housing prices; eliminating itemized mortgage interest and property tax deductions would cause housing prices to fall markedly; limiting the mortgage interest deduction while providing a flat-rate credit on the house purchase price could boost housing prices; and the higher 2013 individual income tax rates following the American Taxpayer Relief Act and Affordable Care Act are unlikely to affect housing prices substantially.

Harris concludes that "while it is critical to account for unintended effects of various reforms, the analysis performed in this study suggests that most plausible tax reforms are, at best, likely to have only a modest effect on the cost of housing investment and subsequent housing prices. These findings suggest that housing prices are not necessarily a casualty of a more efficient tax code, and may even benefit from thoughtful tax reform."



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