Tax provisions are once again under discussion as lawmakers look at dueling budget plans
The federal budget process for next year began last week with release by the Senate and House budget committees of their fiscal 2014 plans. The House plan, prepared under the leadership of Rep. Paul Ryan (R-Wis.), chairman of the House Budget Committee, is intended to bring the federal budget into balance in 10 years by limiting spending to about 19 percent of the gross domestic product.
The Senate plan, prepared under the direction of Sen. Patty Murray (D-Wash.), chair of her chamber’s budget committee, is intended to put the budget on a sustainable path to balance by reducing it by about $1.85 trillion, half coming from cuts and half from new revenue. The new revenue would come in part by making changes in the tax code, including by closing “loopholes” and “eliminating wasteful spending in the tax code.”
The budget is just a financial blueprint and doesn’t have the force of law, so even if some version of these two proposals is eventually passed by Congress, any actual spending cuts or tax law changes can’t be known at this point just by looking at these documents.
Even so, they’re important to real estate because they point to what battles REALTORS® could be facing in the months ahead. For example, in talking about closing tax loopholes or eliminating wasteful tax expenditures, lawmakers can use that language as a starting point for looking at deductions and credits that are available to households and individuals today. Could that include the mortgage interest deduction? That’s a possibility, says Evan Liddiard, NAR’s policy analyst on tax issues.
Liddiard sat down with Colin Allen, an NAR Legislative representative, last week to talk about how real estate fares under the two budget proposals in Congress and what comes next in the process. Get their take on how the budget battle is shaping up in the 4-minute video above.
Next step in the process is release of the Obama administration’s budget proposal, which is expected in early April. Last year the administration called for curtailment in the value of itemized deductions for wealthier households.
The “fiscal cliff” has quickly become a commonly used term, but exactly what it means isn’t all that clear, especially for real estate. At it’s most basic level, it refers to sweeping tax cuts enacted a decade ago that will expire at year’s end, so tax rates will automatically rise to where they were before, while at the same time automatic spending cuts—the sequestration enacted when the government’s borrowing limit was raised a year ago–will take effect. Thus, the economy faces a two-pronged hit: taxes going up while federal fiscal spending goes down.
If Congress does nothing, that double hit would mean a negative economic impact of about $650 billion, enough to shrink the economy by 4 percent and push the country back into recession, says NAR Chief Economist Lawrence Yun.
For real estate, that has the potential to derail the recovery that’s been slowly taking hold. Foreclosures would rise, home values would drop, hurting households but also hurting FHA, which could get hit with another wave of bad loans. That could put FHA into financial trouble.
Against this background, the federal government will be looking at a lot of options for averting the cliff while also lowering the federal budget deficit for the long-term. That puts the mortgage interest deduction in the spotlight. But is it a good idea to make changes to that tax provision?
Without a doubt, changing the rules of the game on MID now would mean a tremendous hit on real estate markets and household finances, and it could deal a blow to the broader economy, says Yun.
He and NAR economist Danielle Hale look at the different pieces in play under the fiscal cliff debate and also the economic impact of changing MID in the 9-minute video above. The information is intended to be helpful as you try to put the fiscal cliff conversation into perspective.
Read more on the pro and con of modifying MID in a Dec. 10 segment of The Diane Rehm Show.
There are academics and there are consumers, and on the topic of whether the mortgage interest deduction should be modified as the federal government looks for ways to shrink its budget deficit, the opinions couldn’t be more divergent. Consumers are for preserving MID, because it’s one of the middle class’s key incentives for wealth-building. Academics? Not so much. To them, MID should be on the budget-cutting table.
That’s pretty much how the views divided up on The Diane Rehm Show yesterday morning, which brought together a handful of economists to look at MID in the context of the fiscal-cliff debate going on in Washington.
Among the economists, Seth Hanlon of the Center for American Progress, Eric Toder of the Urban-Brookings Tax Policy Center, and Ed Pinto of the American Enterprise Institute, said some type of phase-down or overall cap on all itemized deductions should be looked at. The lone defender of MID, NAR Chief Economist Lawrence Yun, said in the real world, the deduction is not and has never been the answer to the country’s economic woes. MID has not only been in place over the last 99 years as the U.S. became an economic superpower, but it has become so important to the middle class that tinkering with it, especially now, could greatly destabilize the economy.
“Some economists argue that the mortgage interest deduction is holding back economic growth,” Yun said on the popular radio show, which airs on WAMU 88.5 FM and is nationally distributed by NPR. “I would argue the other way, that homeownership provides incentive for people to work hard when thinking the long-term vision.”
The lion’s share of about a dozen callers to the show agreed with Yun. One said he’d moved to this country and worked for eight years to be able to afford a home and to take advantage of the mortgage interest deduction.
MID “was meant to give people a chance and opportunity to have some liquefiable asset in case they get into a financial disaster later on,” said another caller.
Toder of the Urban-Brookings Center says MID shoud be transitioned over a 10-year period from a deduction to a flat credit. “With a credit, if you have $1,000 of mortgage interest and we have an 18 percent credit in our plan, you’re going to get $180 no matter—of savings directly—no matter what your tax bracket is. So it’s just better targeted at people of all tax brackets.”
But Pinto of AEI says the credit isn’t much of a better idea than the deduction. “it’s going to distort housing once again, and we’ve been distorting housing all too much, particularly home ownership,” he said, claiming that today’s standardized deduction, which households can take on their tax return without itemizing, is enough to cover the interest on most household’s mortgage. In his statement, Pinto didn’t account for the deduction home owners can take for property taxes.
The economists challenging MID pointed to the experience in England, which phased out their version of the mortgage interest deduction over many years, and saw little effect on home values over time. But Yun said that the comparison is misleading, because England had an acute shortage of market housing and values would have gone up no matter what simply on the basis of supply and demand. “Housing start activity in England was much lower in proportionately compared to the U.S.,” Yun said. It “was just a supply restriction that occurred in England.” On the show’s Web site, a listener who’d lived in England for 10 years and owned a home there agreed that the comparison was spurious.
One of the last callers on the show summed up consumers’ concerns, saying the phasing out of MID just looks at one side of the debate budget and misses the impact it will have on the middle class. “You’re doing everything right, saving for college, paying life insurance, etc., you start phasing out your tax benefits,” he said. “You’re absolutely killing the middle class. . . . You can’t—it just—you can’t look at one side of the ledger. ”
Learn more about the federal government’s fiscal-cliff debate and possible impacts of making changes to MID as a deficit-cutting measure in a REALTOR® Magazine video released yesterday with NAR Chief Economist Lawrence Yun and NAR economist Danielle Hale.
Commentators, bloggers, and the Twitterverse have been abuzz with praise for the rousing speeches coming out of the Democratic National Convention in Charlotte, N.C., this week, culminating Thursday night with President Barack Obama accepting his party’s nomination. But now that the political festivities have come to a close, where did housing fall in the ranks of Democratic priorities?
Although not as prevalently spotlighted as jobs, healthcare, or education, housing—specifically the mortgage interest deduction (MID)—did receive a nod in Obama’s acceptance speech.
“I refuse to ask middle class families to give up their deductions for owning a home or raising their kids just to pay for another millionaire’s tax cut,” Obama said in his acceptance speech. In a jab at what Democrats see as a Republican platform that favors the wealthy, Obama said, “I want to reform the Tax Code so that it’s simple, fair, and asks the wealthiest households to pay higher taxes on incomes over $250,000—the same rate we had when Bill Clinton was president, the same rate we had when our economy created nearly 23 million new jobs, the biggest surplus in history, and a whole lot of millionaires to boot.” Continue reading »
Representatives from the National Association of REALTORS® were in attendance at both the DNC and RNC, appearing and speaking at various real estate-related forums in support of housing issues.
During the North Carolina and Charlotte REALTOR® associations’ breakfast Wednesday welcoming member delegates, First Vice President Steve Brown of Dayton, Ohio, celebrated the increasing strength of real estate markets nationwide. With five consecutive months of sales increases, home sales are currently up 10.4 percent over last year, he said.
Outside the DNC
“This is the first time we’ve seen five consecutive months of sales increases since 2006,” Brown said. “So if anyone asks you, ‘Are we better off today than we were four years ago?’—even though I represent the REALTOR® Party, I’m here to tell you that yes, we are.”
Looking ahead at 2013, whether it’s Obama or Romney who wins the election, Brown was clear on the issues at hand for REALTORS®: distressed properties and releasing shadow inventory into the market, addressing tight lending standards, and preserving the mortgage interest deduction. Continue reading »
The value of the mortgage interest deduction (MID) and other itemized deductions for wealthier households would be trimmed in the fiscal 2013 budget proposal President Barack Obama released yesterday, but as in the previous three years, the proposal is expected to attract little support in Congress.
As in previous years, the budget would reduce the value of itemized deductions to 28 percent for married couples with incomes over $250,000 and individuals with income over $200,000. Currently, depending on the tax bracket these households are in, the value of their deductions could be as high as 33 or 35 percent.
The proposal has never attracted sufficient support in either party to be considered, and NAR President Moe Veissi in a statement yesterday said the association would strongly oppose this or any proposal that would limit MID and other itemized deductions.
“The mortgage interest deduction is vital to the stability of the American housing market and economy,” Veissi said. “We urge the president and Congress to do no harm” to today’s fragile economic recovery. “The nation’s homeowners already pay 80 to 90 percent of U.S. federal income taxes. Raising taxes on them, now or in the future, could critically erode home values at all price levels.”
The budget request also includes a previously rejected proposal to tax the carried interest of general partners in investment partnerships, including real estate partnerships, as ordinary income rather than as capital gains, which is taxed at 15 percent. If taxed as ordinary income, it could be taxed at a higher rate, depending on the taxpayer’s tax bracket.
Analysts have said that this provision is mainly aimed at general partners of hedge funds, but general partners in real estate partnerships could get caught unintentionally in it, and NAR in the past has opposed the tax change.
Overall, the budget request, which is just the opening step in a long process in which Congress will develop a budget for passage, envisions fiscal year 2013 spending of about $3.8 trillion. Of that amount, several hundred billion would be new spending for infrastructure, research and development, and other priorities of the administration. The budget envisions cutting about half a trillion dollars from the defense budget, and another roughly half a trillion dollars through tax law changes, including the NAR-opposed curbs to the value of MID for upper-income households. More savings would cone from allowing tax cuts enacted during President George W. Bush’s administration to expire for all households except those earning less than $250,000.
In all, the administration is saying it would cut the deficit by about $3 trillion over 10 years, plus another trillion dollars from legislation Congress passed in August of last year as part of the budget deal to raise the debt ceiling cap.
For the MID curbs, click here and scroll to page 39.
By Robert Freedman, senior editor, REALTOR® Magazine
The first thing to note about the congressional super committee’s failure to agree to deficit cuts is that MID is spared for the time-being. Among the deals the members of the deficit-cutting committee looked at was a change to itemized deductions, including the mortgage interest deduction. That change was rejected, and in any case no broader deal was worked out. So, MID is off the table for the moment. But it’s worth noting that it was one of the few big-ticket items that got a serious look, which suggests that it will remain a target into the foreseeable future.
What happens next? According to NAR Tax Director Linda Goold, unless Congress passes legislation to change things, some $1.2 trillion in federal programs will be automatically cut in 2013. If that happens, communities in which defense bases and other defense resources play a big role will be hit hard, because defense is slated to take the biggest cut of all. That means bases could be scaled back, and if that happens, the communities in which those bases are housed will see reduced demand for home sales and rentals.
HUD programs will be cut, too. That will mainly hit rental subsidy programs, but it will also hit community development block grants (CDBG) and HOME Investment Partnership grants, which provide grants to communities for affordable housing.
Of course, the broader impact is what all this is doing to our economy. Long-term rates are expected to remain low, if only because the Federal Reserve has said it intends to keep them low. But could the U.S. see another cut in its credit rating? At what point will investors, including foreign investors, start reducing their Treasury purchases?
Plus, there are some wildcards: some estate tax laws are expiring in 2012, as are the tax cuts that were put into place by President George W. Bush in 2001. And in 2013 the deficit ceiling will have to be raised again. What all this means is that we’re looking at another year of deficit-cutting debates in Congress.
NAR Tax Director Linda Goold looks at what we can expect as a result of the super committee’s lack of agreement in the five-minute video above.
By Katherine Tarbox, Senior Editor, REALTOR® Magazine
It took me some years to figure this out: The moment you take something for granted, you’ve lost it. I’ve had to learn this lesson enough times when it comes to the most important things such as health, relationships, jobs, and even homes. I think many people, sadly, had a fresh awakening about taking housing for granted as Hurricane Irene battered much of the East Coast this past weekend.
I've never seen grocey store aisles so bare, as people bought weeks worth of canned food to prepare for Hurricane Irene
I am scheduled to ride the Home Ownership Matters Bus for the next two weeks. I left for Connecticut on Friday to attend an event on Saturday. I knew that I was essentially flying to a hurricane to get stuck in it. I kind of liked the idea of having a front row seat for mother nature’s extremes.
Connecticut was declared a state of emergency Saturday morning and alas, they canceled the event. I immediately went into my version of survival mode and headed to the grocery store to stock up on water, batteries, a flashlight, and food. I learned that Pop Tarts were the most in-demand hurricane food and were sold out at both grocery stores I went to. My mother lived through Hurricane Gloria in 1983 and remembered that parts of Connecticut were without power for up to a month. I didn’t know what to expect. Continue reading »
Editor’s Note: REALTOR Magazine welcomes guest blogger Jeremy Conaway with his take on the proposed Political Survival Initiative. Conaway is an expert in the field of real estate brokerage, association, and MLS design, and a leading strategist in the real estate industry.
By Jeremy Conaway, President of RECON Intelligence Services
This is a time of challenge for all Americans. We live in a environment ravaged by a recession that seems to defy recovery, made confusing by a global economy that seems to take as much as it gives, a generational mash-up that seems to defy compromise, and a tsunami of knowledge that keeps us in constant confusion by “invading” every aspect of our personal and professional lives. This is the very definition of a renaissance, a time of reawakening and renewal, an environment in which opportunity is the key element.
Nowhere have these forces impacted as significantly as they have in our real estate industry. It is almost impossible to find a single geographic area, market segment, or professional group that isn’t dealing with massive shifts, transitions, and changes in one or more of its most basic and critical operational elements. The cause of each of these “life quakes” can be traced to some combination of the current economic, regulatory, demographic, generational, and knowledge forces that are sweeping across the American political, business, and cultural landscape.
The men and women who are experiencing these events as REALTORS® tend to communicate one of two reactions and responses to their representatives within organized real estate. The first reaction comes from a group that sincerely and honestly believes that the current economic, market, and consumer-centric environment can be likened to a bad storm, and that the best response is just to chill out and let it pass. Life’s experience has taught them that, sometimes, “waiting it out” is the best response to a threatening situation. This group wants organized real estate to protect their position during the storm and preserve a marketplace that will allow them to continue their traditional practice once the storm has passed. It cannot be denied that sometimes the best solution to stress and trauma is just to take a nap and live to deal with it another day.
The second reaction comes from a group that sincerely and honestly believes that success and survival in a renaissance requires them to be in the middle of the fray. For this group, satisfaction comes from being armed with the best technology, a winning strategy, and the ability to mount a courageous campaign into the middle of the social media battleground. For these connected warriors the entire battle takes place somewhere between the software and the Internet. If it cannot be reduced to a blog, a ‘tweet’ or an ‘app’, the challenge just doesn’t exist.
It is against this backdrop that a group of industry consultants and NAR staff convened in Chicago to consider the REALTOR® future – the varying needs, expectations and, indeed, demands of the NAR membership. Finally one member summed up what we all agreed was the very essence of our long discussion: “It is like we are caught between providing a nap and an app.” Continue reading »
By Katherine Tarbox, Senior Editor, REALTOR® Magazine
The day before the National Association of REALTORS® starts its Home Ownership Matters Bus Tour at the Chicago Flower & Garden Show, REALTORS® from the Chicago area gathered at NAR headquarters Friday for a town hall-style meeting. The topic: the state of home ownership in America today.
2011 NAR President-Elect Moe Veissi, in Chicago for the kick-off, encouraged REALTORS® attending the meeting to start talking with peers and clients about how much the U.S. economy is affected by home ownership. ”We need to spread the word,” he told the 100 or so REALTORS® in the audience. Key messages he asked members to share:
- The housing market makes up $4 trillion, or about 15 percent, of the total U.S. gross domestic product.
- The housing industry has led the way out of six of the last eight U.S. recessions.
- For every two homes sold in the United States, one job is created.
"You want stimulus? Don't mess with the MID!" 2011 NAR President-Elect Moe Veissi said during a town hall meeting in Chicago March 4.
Veissi asked members to join in the fight by voicing their concerns to their elected officials and by sharing these statistics publicly in their community. ”Let’s help the American consumer understand how vital home ownership is to a healthy U.S. economy,” he said, “and how it helps to create the thing we need most right now, jobs.”
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