There are certain signs of spring - birds, flowers and renewed interest in tax reform on Capitol Hill.
The desire to streamline the tax collection process is justifiably strong among policymakers and voters. The National Association of Realtors understands this.Our 700,000 members are taxpayers as well as real estate professionals, and we have no desire to make the reporting system more cumbersome. We support simplification, if it is reasoned and produces actual improvements. How-ever, we do not support change that wipes out the good with the bad - just for the sake of change.
Virtually all lawmakers and industry analysts acknowledge that the federal government's role in housing has been cut substantially over the years, and depending on the point of view, this change has been positive or negative. However, although its role in providing housing is different, the federal government has remained a strong proponent of incentives to foster homeownership.
A case in point: the mortgage interest deduction - one of the most used of the federal income tax deductions.
Now, in the search for ways to "fix" the tax code, this popular deduction is once again being threatened. It may seem like a simple idea to eliminate the mortgage interest deduction, along with all itemized deductions, and replace our current system with a flat tax system. Simple, perhaps. Foolish, absolutely.
Flat tax? At what rate? And, what would keep the flat rate from going up? Chances are the rate would be adjusted over time, and chances are even better that the rate would be adjusted upward, rather than downward.
Take a close look at mortgage interest deductibility and the price that would be paid for its loss. This deduction is not a privilege reserved for the well-housed seeking to be better housed. Of the 24 million families who claim this deduction, 76 percent have household incomes of less than $75,000 and 45 percent have incomes below $50,000. Eliminating this deduction would amount to a tax increase for the middle class.
Two years ago, when the issue of tax code overhaul started gaining attention, DRI/McGraw-Hill analyzed the economic impact of eliminating the mortgage interest deduction. Their study concluded that home values would drop an average of 15 percent, causing mortgage defaults to triple, and home foreclosure rates to double. Those figures are sobering.
Eliminating the tax incentives for homeownership would, in many cases, cause home values to sink below the outstanding mortgages on the properties, pushing the owners into default.
Homeowners most likely to be affected are those who are highly leveraged - who have made down payments of less than 20 percent. These "low-down payment" buyers often are first-time buyers with modest incomes. Today, first-time homebuyers constitute nearly half the market for housing. Why should they be placed at risk?
The mortgage interest deduction has been an important part of U.S. tax policy since the federal income tax code was adopted in 1913. Federal legislators recognized that the American ideal of individual home-own-er-ship would be fostered by permitting homeowners to reduce their tax bills with mortgage interest and real estate tax deductions.
A home purchase - the largest investment most families will ever make - builds national savings and individual wealth, provides tax revenues for local governments and stimulates growth in all housing-related industries. Real estate and housing have a heavy influence on this nation's economy, making measures that help people become home owners worth preserving.
The pursuit of homeownership deserves special treatment in the federal tax code. Our government should encourage investments that contribute to the economic and social enrichment of our communities. Few investments equal home-ownership in terms of payback for America.