Industry groups representing Realtors, home builders and mortgage lenders are up in arms over the Obama administration’s proposal to roll back the itemized deduction rate for wealthy taxpayers — including deductions homeowners can claim on mortgage-interest payments and other expenses associated with homeownership.
The rollback of the tax break wouldn’t take effect until 2011, and would apply only to families earning more than $250,000 and individuals making $200,000 or more — less than 4 percent of taxpayers in 2006.
The Obama administration, which floated the idea in releasing its proposed budget Thursday, says capping the itemized deduction rate for wealthy families and individuals at 28 percent would raise $318 billion over 10 years, expanding health insurance coverage while lowering health care costs.
But real estate industry groups say the change would hurt home sales and prices at a time when homebuyers need incentives, not disincentives, to buy.
Any changes to the mortgage interest deduction would devalue homes, hurting middle-class families and potentially triggering "yet another crisis in home values, even as we struggle to recover from the first," the National Association of Realtors said in a letter to President Obama.
NAR declared the proposal "has the potential to become a major impediment to a recovery in real estate markets across the nation," setting off a new round of home-price depreciation that could further undermine bank balance sheets and fuel a second credit crisis. The group told members it is "prepared to use its formidable array of resources against its enactment."
The Mortgage Bankers Association noted that the rule change would also apply to itemized deductions for real estate taxes on a primary residence and mortgage insurance.
"Given the current state of the market, this proposal could have an adverse effect on a market that is already in trouble, and this is not the time to reduce incentives for buying or refinancing a home," MBA Chairman David Kittle said in a statement.
The National Association of Home Builders is also opposed to the change, and said the proposed budget could dent investment in multifamily and commercial real estate because it also proposes treating "carried interest" as ordinary income.
"At this critical point in the recession, we should be doing everything we can to stimulate demand in housing and avoid proposals that would reduce housing affordability and further destabilize prices," NAHB Chairman Joe Robson said in a statement.
The Obama administration defended the proposal, saying its budget provides tax cuts for 95 percent of working families and sets a path for $2 trillion in deficit reductions over the next decade. The administration’s plan calls for cutting spending by $1 trillion and collecting $1 trillion in additional taxes and revenue over that period.
"The bottom line is that despite what some people are saying, no tax increases would take effect during the recession," said Peter Orszag, director of the Office of Management and Budget, in a statement.
Taxpayers would still be allowed to claim itemized deductions, but beginning in 2011, only at a maximum rate of 28 percent, instead of the higher 33 percent and 35 percent tax rates in place for top income brackets.
In other words, a household that’s in the top tax bracket claiming $10,000 in itemized deductions would have only $2,800 knocked off their tax bill (28 percent), instead of $3,500 now (35 percent) — a difference of $700.
According to the most recent data from the Internal Revenue Service, only about 3.4 percent of the 106.7 million personal tax returns filed in 2006 were subject to the 33 percent and 35 percent tax rates.
Some critics have said the current system favors the wealthy, because itemized deductions are worth less to families in lower tax brackets.
Harvard University economics professor Edward Glaeser argues that allowing taxpayers to claim mortgage-interest payments as itemized deductions encourages risky borrowing, pushes up prices in markets where the supply of new homes is constrained, and is "wildly regressive."
"If the goal of the deduction is just to increase homeownership, then it would make far more sense just to give a flat tax credit to people who buy homes," Glaeser said in a post on the New York Times’ Economix blog.
Taxpayers are currently allowed to claim as itemized deduction interest paid on mortgage debt of up to $1 million on a primary residence and one additional home, plus interest paid on home equity loans of up to $100,000. They can also claim itemized deductions for state and local property taxes and mortgage insurance.
NAR, NAHB and other real estate industry groups helped shoot down a 2005 proposal from a White House advisory panel on tax reform to eliminate the mortgage interest payment and property tax deductions in favor of a 15 percent tax credit. The panel also recommended lowering the $1.1 million mortgage ceiling on the deduction by setting a cap tied to Federal Housing Administration mortgage limits (see story).
Howard Gleckman, a senior research associate at the Urban Institute’s Tax Policy Center, said at first glance, the Obama administration’s new proposal to cap the itemized deduction rate at 28 percent "has some merit" as tax policy.
"Deductions benefit high earners more than ordinary working people," Gleckman said in a post on the Tax Policy Center’s blog, TaxVox. A $100 deduction is worth $35 to a high earner in the top tax bracket, but only $10 for a wage earner in the 10 percent tax bracket, Gleckman noted.
A 28 percent cap may seem to "bite especially hard" to the wealthy, he said, because Obama has also talked about raising the top tax brackets to 36 percent and 39.6 percent. But many of the roughly 3 million taxpayers who might be subject to the tax hike have already seen deductions limited to 28 percent by the Alternative Minimum Tax.
The plan to cap the itemized deduction rate at 28 percent for all taxpayers is "hopelessly tangled up" in the Alternative Minimum Tax, Gleckman said, because those subjected to it have already "given at the office," so to speak.
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