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| <title> - TAX REFORM AND RESIDENTIAL REAL ESTATE</title> | |
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| [House Hearing, 113 Congress] | |
| [From the U.S. Government Publishing Office] | |
| TAX REFORM AND RESIDENTIAL REAL ESTATE | |
| ======================================================================= | |
| HEARING | |
| BEFORE THE | |
| COMMITTEE ON WAYS AND MEANS | |
| U.S. HOUSE OF REPRESENTATIVES | |
| ONE HUNDRED THIRTEENTH CONGRESS | |
| FIRST SESSION | |
| __________ | |
| APRIL 25, 2013 | |
| __________ | |
| Serial No. 113-FC06 | |
| __________ | |
| Printed for the use of the Committee on Ways and Means | |
| [GRAPHIC NOT AVAILABLE IN TIFF FORMAT] | |
| U.S. GOVERNMENT PUBLISHING OFFICE | |
| 21-124 WASHINGTON : 2017 | |
| _________________________________________________________________________________________ | |
| For sale by the Superintendent of Documents, U.S. Government Publishing Office, | |
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| COMMITTEE ON WAYS AND MEANS | |
| DAVE CAMP, Michigan, Chairman | |
| SAM JOHNSON, Texas SANDER M. LEVIN, Michigan | |
| KEVIN BRADY, Texas CHARLES B. RANGEL, New York | |
| PAUL RYAN, Wisconsin JIM MCDERMOTT, Washington | |
| DEVIN NUNES, California JOHN LEWIS, Georgia | |
| PATRICK J. TIBERI, Ohio RICHARD E. NEAL, Massachusetts | |
| DAVID G. REICHERT, Washington XAVIER BECERRA, California | |
| CHARLES W. BOUSTANY, JR., Louisiana LLOYD DOGGETT, Texas | |
| PETER J. ROSKAM, Illinois MIKE THOMPSON, California | |
| JIM GERLACH, Pennsylvania JOHN B. LARSON, Connecticut | |
| TOM PRICE, Georgia EARL BLUMENAUER, Oregon | |
| VERN BUCHANAN, Florida RON KIND, Wisconsin | |
| ADRIAN SMITH, Nebraska BILL PASCRELL, JR., New Jersey | |
| AARON SCHOCK, Illinois JOSEPH CROWLEY, New York | |
| LYNN JENKINS, Kansas ALLYSON SCHWARTZ, Pennsylvania | |
| ERIK PAULSEN, Minnesota DANNY DAVIS, Illinois | |
| KENNY MARCHANT, Texas LINDA SANCHEZ, California | |
| DIANE BLACK, Tennessee | |
| TOM REED, New York | |
| TODD YOUNG, Indiana | |
| MIKE KELLY, Pennsylvania | |
| TIM GRIFFIN, Arkansas | |
| JIM RENACCI, Ohio | |
| Jennifer M. Safavian, Staff Director and General Counsel | |
| Janice Mays, Minority Chief Counsel | |
| C O N T E N T S | |
| __________ | |
| Page | |
| Advisory of April 25, 2013 announcing the hearing................ 2 | |
| WITNESSES | |
| Mark A. Calabria, Ph.D., Director of Financial Regulation | |
| Studies, Cato Institute, Washington, DC........................ 45 | |
| Robert Dietz, Assistant Vice President for Tax and Policy Issues, | |
| National Association of Home Builders, Washington, DC.......... 125 | |
| Mark Fleming, Ph.D., Chief Economist, CoreLogic, McLean, VA...... 6 | |
| Jane G. Gravelle, Senior Specialist in Economic Policy, | |
| Congressional Research Service, Washington, DC................. 33 | |
| Thomas F. Moran, Chairman and Managing Partner, Moran & Company, | |
| Chicago, IL, on behalf of the National Multi Housing Council | |
| and the National Apartment Association......................... 161 | |
| Robert Moss, Senior Vice President, Boston Capital, Boston, MA, | |
| on behalf of the Housing Advisory Group........................ 174 | |
| Phillip L. Swagel, Professor of International Economic Policy, | |
| University of Maryland School of Public Policy, College Park, | |
| MD............................................................. 64 | |
| Gary Thomas, President, National Association of Realtors, | |
| Washington, DC................................................. 103 | |
| Eric J. Toder, Institute Fellow, Urban Institute, and Co- | |
| Director, Urban-Brookings Tax Policy Center, Washington, DC.... 12 | |
| TAX REFORM AND RESIDENTIAL REAL ESTATE | |
| ---------- | |
| THURSDAY, APRIL 25, 2013 | |
| U.S. House of Representatives, | |
| Committee on Ways and Means, | |
| Washington, DC. | |
| The Committee met, pursuant to call, at 9:38 a.m., in Room | |
| 1100, Longworth House Office Building, Hon. Dave Camp [Chairman | |
| of the Committee] presiding. | |
| [The advisory announcing the hearing follows:] | |
| ADVISORY FROM THE COMMITTEE ON WAYS AND MEANS | |
| FOR IMMEDIATE RELEASE CONTACT: (202) 225-3625 | |
| Thursday, April 18, 2013 | |
| No. FC-06 | |
| Camp Announces Hearing on | |
| Tax Reform and Residential Real Estate | |
| Congressman Dave Camp (R-MI), Chairman of the Committee on Ways and | |
| Means, today announced that the Committee will hold a hearing on | |
| Federal tax provisions that affect residential real estate as part of | |
| the Committee's continued work on comprehensive tax reform. The hearing | |
| will take place on Thursday, April 25, 2013, in Room 1100 of the | |
| Longworth House Office Building, beginning at 9:30 a.m. | |
| In view of the limited time available to hear witnesses, oral | |
| testimony at this hearing will be from invited witnesses only. However, | |
| any individual or organization not scheduled for an oral appearance may | |
| submit a written statement for consideration by the Committee and for | |
| inclusion in the printed record of the hearing. | |
| BACKGROUND: | |
| A number of different Federal tax provisions directly affect | |
| residential real estate and the housing sector. The mortgage interest | |
| deduction and the deduction for State and local real property taxes are | |
| available to the roughly one-third of taxpayers who itemize their | |
| deductions, but not to the roughly two-thirds of taxpayers who instead | |
| take the standard deduction. For some taxpayers, however, these | |
| deductions are reduced by the recently reinstated ``Pease'' limitation | |
| on itemized deductions, and the real property tax deduction is | |
| completely disallowed for taxpayers subject to the Alternative Minimum | |
| Tax (AMT). Other significant housing-related tax provisions include the | |
| exclusion of gain on the sale of a principal residence, the low-income | |
| housing tax credit, the temporary exclusion from income of cancellation | |
| of mortgage debt, and numerous other provisions. | |
| In announcing this hearing, Chairman Camp said, ``As we continue to | |
| work toward comprehensive tax reform that makes the Code simpler and | |
| fairer so that more jobs with better pay are created, it is important | |
| to do a top to bottom review of the Code. Home ownership is an integral | |
| part of the American dream, and the Tax Code has long provided a | |
| variety of incentives to make it easier for families to buy and own a | |
| home. Before considering any proposal, the Committee must better | |
| understand how tax reform might affect the housing sector and this | |
| hearing is an opportunity to hear directly from both academic experts | |
| and industry stakeholders.'' | |
| FOCUS OF THE HEARING: | |
| The hearing will consider how certain Federal tax provisions affect | |
| the housing sector and home ownership--and the benefits of such | |
| investment. It will explore how tax policy affects the relative level | |
| of investment between residential real estate and other parts of the | |
| economy (such as business investment). | |
| DETAILS FOR SUBMISSION OF WRITTEN COMMENTS: | |
| Please Note: Any person(s) and/or organization(s) wishing to submit | |
| written comments for the hearing record must follow the appropriate | |
| link on the hearing page of the Committee website and complete the | |
| informational forms. From the Committee homepage, http:// | |
| waysandmeans.house.gov, select ``Hearings.'' Select the hearing for | |
| which you would like to submit, and click on the link entitled, ``Click | |
| here to provide a submission for the record.'' Once you have followed | |
| the online instructions, submit all requested information. ATTACH your | |
| submission as a Word document, in compliance with the formatting | |
| requirements listed below, by the close of business on Thursday, May 9, | |
| 2013. Finally, please note that due to the change in House mail policy, | |
| the U.S. Capitol Police will refuse sealed-package deliveries to all | |
| House Office Buildings. For questions, or if you encounter technical | |
| problems, please call (202) 225-3625 or (202) 225-2610. | |
| FORMATTING REQUIREMENTS: | |
| The Committee relies on electronic submissions for printing the | |
| official hearing record. As always, submissions will be included in the | |
| record according to the discretion of the Committee. The Committee will | |
| not alter the content of your submission, but we reserve the right to | |
| format it according to our guidelines. Any submission provided to the | |
| Committee by a witness, any supplementary materials submitted for the | |
| printed record, and any written comments in response to a request for | |
| written comments must conform to the guidelines listed below. Any | |
| submission or supplementary item not in compliance with these | |
| guidelines will not be printed, but will be maintained in the Committee | |
| files for review and use by the Committee. | |
| 1. All submissions and supplementary materials must be provided in | |
| Word format and MUST NOT exceed a total of 10 pages, including | |
| attachments. Witnesses and submitters are advised that the Committee | |
| relies on electronic submissions for printing the official hearing | |
| record. | |
| 2. Copies of whole documents submitted as exhibit material will not | |
| be accepted for printing. Instead, exhibit material should be | |
| referenced and quoted or paraphrased. All exhibit material not meeting | |
| these specifications will be maintained in the Committee files for | |
| review and use by the Committee. | |
| 3. All submissions must include a list of all clients, persons and/ | |
| or organizations on whose behalf the witness appears. A supplemental | |
| sheet must accompany each submission listing the name, company, | |
| address, telephone, and fax numbers of each witness. | |
| The Committee seeks to make its facilities accessible to persons | |
| with disabilities. If you are in need of special accommodations, please | |
| call 202-225-1721 or 202-226-3411 TDD/TTY in advance of the event (four | |
| business days notice is requested). Questions with regard to special | |
| accommodation needs in general (including availability of Committee | |
| materials in alternative formats) may be directed to the Committee as | |
| noted above. | |
| Note: All Committee advisories and news releases are available on | |
| the World Wide Web at: http://www.waysandmeans.house.gov/. | |
| ------- | |
| Chairman CAMP. Good morning. The Committee will come to | |
| order. | |
| Good morning and thank you for joining us today as we | |
| continue our dialogue with individuals, families, and job | |
| creators of all sizes about the critical steps that Congress | |
| can take through tax reform to get our economy back on solid | |
| footing. | |
| My position is well known: It is important for Congress to | |
| fix our broken Tax Code. As anyone in this room who just | |
| completed their taxes in the last few weeks will tell you, | |
| today's Tax Code is far too complex, it takes far too much time | |
| and too much money to comply with. And while I often joke that | |
| the Code is more than 10 times the size of the Bible with none | |
| of the good news, what I should also add is that not everything | |
| in the Code is bad. However, with more than 4,000 changes made | |
| to the Tax Code in the last decade alone, more than one per | |
| day, it is tough to imagine that all those changes have made | |
| the Code more user friendly. It is just the opposite. And that | |
| is why we owe it to the American people to go line by line | |
| through the Code to see how we can make it work better for | |
| hard-working taxpayers, not just those who can afford a good | |
| accountant. | |
| The two primary keys to tax reform are to make the Tax Code | |
| simpler, fairer, and more transparent for families and | |
| employers, and to strengthen the economy so that we can create | |
| more jobs and increase wages for American families. | |
| So today, as part of our top-to-bottom review of the Code, | |
| we will examine how tax policy related to residential real | |
| estate lines up with those goals, and we will do so with two | |
| questions in mind. Does current tax policy help American | |
| families and does it make our economy stronger? | |
| Home ownership is an integral part of the American dream, | |
| and the Tax Code has long provided a variety of incentives to | |
| make it easier for families to buy and own a home. We also know | |
| that the real estate industry plays a large role in our | |
| economy. So this is an area that needs careful, thoughtful | |
| review. | |
| A number of Federal tax preferences provide for benefits | |
| for residential real estate. While some are very familiar, | |
| others are lesser known. Although these provisions all pertain | |
| to housing, each is governed by different rules and criteria. | |
| If we are looking to understand how complex, confusing and | |
| costly our Code can be, consider just a few of the following | |
| examples involving residential real estate. | |
| Perhaps the most well known tax provision affecting real | |
| estate is the mortgage interest deduction, which has specific | |
| rules and limitations. For instance, only taxpayers who itemize | |
| their deductions may deduct mortgage interest. Other | |
| interactions within the Tax Code can also limit the use of this | |
| provision. | |
| By way of example, the deduction for interest on home | |
| equity indebtedness is disallowed for purposes of the | |
| alternative minimum tax. Furthermore, Federal tax benefits for | |
| real estate treat homeowners differently than renters. A | |
| taxpayer who pays $1,000 per month to rent an apartment may not | |
| deduct that amount from income, but a taxpayer who pays | |
| mortgage interest of $1,000 may take a deduction if they | |
| itemize. | |
| Though these examples are from real estate provisions, this | |
| complexity plagues the entire Code and underscores one simple | |
| fact: The Tax Code is a mess. You shouldn't need an army of | |
| lawyers and accountants to understand our Tax Code and it | |
| shouldn't take American taxpayers over 6 billion hours and $168 | |
| billion every year to comply with the Code. We should get rid | |
| of the loopholes in the Code and make it more efficient and | |
| effective for hard-working taxpayers. | |
| However, as we get started today, let me emphasize that not | |
| every credit or deduction is a loophole. The largest investment | |
| most people have is their home. And as I noted earlier, | |
| policies like the home mortgage interest deduction have played | |
| a big role in home ownership. | |
| I also believe that tax reform, which can help us to create | |
| a stronger economy with higher paychecks, is one of the best | |
| ways we can help families struggling to save for college, save | |
| for retirement, or of particular interest to some on our second | |
| panel today, save for a downpayment on that first home. | |
| So I look forward to the testimony of both panels today and | |
| I hope that the witnesses will help this Committee better | |
| understand how we can balance the goal of that simpler and | |
| fairer Code with the needs facing consumers in the residential | |
| marketplace. Both are important to American families, and your | |
| expertise and insight will be critical to all of us in meeting | |
| their needs. | |
| Thank you. | |
| I will now recognize the Ranking Member for his opening | |
| statement. | |
| Mr. LEVIN. Thank you, Mr. Chairman. Welcome to our panel. | |
| The topic before us is an important one. The Federal | |
| Government, through the Tax Code, has been involved in | |
| promoting home ownership for over a century. Let's be clear: | |
| There are many egregious loopholes in the Tax Code, but the | |
| main provisions incentivizing home ownership are policies, not | |
| loopholes. | |
| The failure to differentiate which is which between | |
| policies and real loopholes has led to some facile proposals. | |
| Among them are proposals that begin without the mortgage | |
| interest or any other deductions, or proposals that simply pick | |
| a much lower tax rate than present law without any suggestions | |
| as to how to fill the trillions in lost revenue that would | |
| result. | |
| Such proposals have failed to take into account some basic | |
| facts, including the growing income gap, and they have failed | |
| to consider adequately whether policies are significant for a | |
| strong middle class or mainly for very wealthy families. | |
| According to the Joint Committee on Taxation, two-thirds, 70 | |
| percent of the benefit of the mortgage interest deduction goes | |
| to households earning less than $200,000 a year. Less than a | |
| third of the benefit, 30 percent, goes to those who make more | |
| than that. | |
| By comparison, the reduced rate for capital gains almost | |
| exclusively benefits the very wealthy. More than 70 percent of | |
| the benefit of that lower rate flows to people making more than | |
| $1 million a year, just 12 percent to those making less than | |
| $200,000. | |
| These tax policies deserve, indeed, serious consideration | |
| beyond the easy rhetoric about simply broadening the base and | |
| reducing rates. So I hope that today this hearing will be a | |
| step in the direction of this serious consideration. | |
| Thank you, Mr. Chairman. | |
| Chairman CAMP. Well, thank you, Mr. Levin. | |
| Now it is my pleasure to welcome our first panel of | |
| experts, all of whom bring a wealth of experience from a | |
| variety of perspectives. Their experience and insights will be | |
| very helpful as the Committee considers the impact of Federal | |
| tax reform on residential real estate. | |
| First, I would like to welcome Mark Fleming, the Chief | |
| Economist at CoreLogic. Mr. Fleming has over 15 years of | |
| experience in the mortgage and property analysis business. | |
| Second, we will hear from Eric Toder, Institute Fellow at | |
| the Urban Institute and Co-Director of the Urban-Brookings Tax | |
| Policy Center in Washington, D.C. Mr. Toder is a veteran of the | |
| Treasury Department, CBO, and the IRS. | |
| Third, we will hear from Jane Gravelle, Senior Specialist | |
| in Economic Policy and a long-time veteran of the Congressional | |
| Research Service. | |
| Fourth, we will hear from Mark Calabria, Director of | |
| Financial Regulation Studies at the Cato Institute, also in | |
| Washington, D.C. Mr. Calabria has had a broad career, spending | |
| time at HUD, the National Association of Home Builders, the | |
| National Association of Realtors, and the Senate Banking | |
| Committee. | |
| Finally, we will hear from Phillip Swagel, Professor of | |
| International Economic Policy at the University of Maryland | |
| School of Public Policy in College Park. Mr. Swagel is a former | |
| Assistant Secretary for Economic Policy at the Treasury | |
| Department. | |
| And thank you all for being with us today. The Committee | |
| has received each of your written statements and they will be | |
| made part of the formal hearing record. Each of you will be | |
| recognized for your oral remarks for 5 minutes. | |
| And so, Mr. Fleming, we will begin with you. You have 5 | |
| minutes. Welcome. | |
| STATEMENT OF MARK FLEMING, PH.D., CHIEF ECONOMIST, CORELOGIC, | |
| MCLEAN, VA | |
| Mr. FLEMING. Thank you. Chairman Camp, Ranking Member | |
| Levin, and distinguished Members of the Committee on Ways and | |
| Means, CoreLogic appreciates the opportunity to submit this | |
| testimony regarding tax reform and residential real estate. | |
| My name is Mark Fleming, and I am Chief Economist for | |
| CoreLogic, a leading global provider of consumer, financial, | |
| and property information, analytics and services to businesses | |
| and government. Our company combines public, contributory, and | |
| proprietary data to develop predictive decision analytics and | |
| provide business services that bring dynamic insights to our | |
| customers in the residential mortgage origination, | |
| securitization, and servicing markets, as well as other private | |
| sector institutions and government. | |
| One of the brightest spots within the uneven economic | |
| recovery at the moment is the housing sector. Residential | |
| investment contributed about half a percentage point to GDP | |
| growth in Q4 of 2012, very significant for a single industrial | |
| sector. In March of 2013, residential investment continued to | |
| grow. Housing starts increased to an annualized rate of 1 | |
| million, which is 47 percent above the level for the same month | |
| a year earlier and the largest increase in more than 20 years. | |
| Home prices consequently have rose 10.2 percent year-over-year, | |
| the largest increase in nearly 7 years, and our pending house | |
| price index indicates that price growth in March will continue | |
| the trend. | |
| One of the features of the American Recovery and | |
| Reinvestment Act of 2009 was a first-time home buyer tax credit | |
| aimed at stimulating the real estate sales market. In the first | |
| half of 2009, before the impact of the tax credit could be | |
| felt, home sales were declining at a rate of 15 percent from | |
| the prior year. However, by September of 2009, sales were at | |
| the same level as the prior year, and by November 2009, the | |
| month of expiration, sales were up 34 percent from the prior | |
| year, nearly a 50 percentage point improvement in under 1 year. | |
| When the tax credit was extended to April of 2010, sales | |
| increased at an average rate of 12 percent annualized until | |
| expiration of the credit. However, as soon as the tax credit | |
| expired, the volume of home sales dropped, averaging a rate of | |
| 18 percent annualized for the remainder of the year. | |
| Furthermore, prior to the expiration of the tax credit, | |
| expensive home sales increased more rapidly than low and | |
| moderately priced home sales. The tax credit stimulated current | |
| demand at the expense of future demand, but did not have a | |
| permanent impact on the market. | |
| While the first-time home buyer tax credit resulted in home | |
| buyers buying sooner than otherwise, the Tax Relief Act of 1997 | |
| causes a subset of sellers to defer sales to a later date. The | |
| Tax Relief Act exempts from taxation the profits on the sale of | |
| a residence of up to $500,000 for married couples filing | |
| jointly and $250,000 for singles if the property has been a | |
| principal residence in 2 of the last 5 years. | |
| Since the Act's tax exclusion can only be applied if the | |
| owner has been living in the property for at least 2 years, it | |
| clearly applies to existing homes and not new homes. Therefore, | |
| the law only impacts existing home sales, but not new sales. | |
| For the 5 years prior to 1997, the existing home sales share of | |
| total sales, new and existing combined, averaged 84 percent. | |
| However, as discussion of the Act became public, the share | |
| declined to below 83 percent as sellers waited for the law to | |
| be enacted, so as to take advantage of the tax exclusion. After | |
| the law was enacted, the share rose above the previous average | |
| for several months, before returning to its long-term average. | |
| In the case of the first-time home buyer tax credit and the | |
| capital gains tax exclusion, market participants changed their | |
| behavior in the short term. | |
| The existing literature on the societal value of home | |
| ownership generally shows that, relative to renting, home | |
| ownership is associated with better-cared-for homes, increased | |
| participation in the community, and better students with lower | |
| likelihood of needing welfare. Assuming that increasing home | |
| ownership to capture these social benefits is a goal of tax | |
| policy, there is a significant amount of economic literature | |
| that studies existing and proposed policies and their | |
| implications for the decision to own versus rent, the amount of | |
| house consumed, and the implications of policy changes on house | |
| prices. | |
| CoreLogic is thankful to the Committee for the opportunity | |
| to provide testimony on the meaningful impact that tax policy | |
| has on participants in the real estate market. We are | |
| encouraged by the Committee's recognition of how data and | |
| analytics can help inform a better understanding of the | |
| relationship between tax policies and the real estate market, | |
| especially as the housing market once again contributes to our | |
| fragile economic recovery. Thank you. | |
| [The prepared statement of Mr. Fleming follows:] | |
| [GRAPHICS NOT AVAILABLE IN TIFF FORMAT] | |
| Chairman CAMP. Well, thank you, Mr. Fleming. | |
| Mr. Toder, you are recognized for 5 minutes. | |
| STATEMENT OF ERIC J. TODER, INSTITUTE FELLOW, URBAN INSTITUTE, | |
| AND CO-DIRECTOR, URBAN-BROOKINGS TAX POLICY CENTER, WASHINGTON, | |
| DC | |
| Mr. TODER. Thank you very much. | |
| Chairman Camp, Ranking Member Levin, and Members of the | |
| Committee, thank you for inviting me to testify today on | |
| reforming the mortgage interest deduction. My statement | |
| represents my views alone and should not be attributed to the | |
| Tax Policy Center or to the Urban Institute, its trustees, or | |
| its funders. | |
| The mortgage interest deduction is one of the largest | |
| individual tax preferences in the Internal Revenue Code. The | |
| Joint Tax Committee estimates it will cost $380 billion between | |
| 2013 and 2017. The Tax Policy Center estimates that about 40 | |
| million taxpayers will benefit from the deduction in 2015. | |
| The current mortgage interest deduction does little to | |
| promote home ownership because it provides no subsidy to | |
| taxpayers who do not itemize deductions and only a very modest | |
| subsidy to taxpayers in the 15 percent bracket. The subsidy | |
| value is largest for families in high tax brackets, who are the | |
| ones most likely to own a home without a subsidy. Other | |
| countries without a mortgage interest deduction have home | |
| ownership rates as high or higher than the United States. | |
| Instead, the deduction mostly encourages homeowners to buy | |
| larger and more expensive homes with borrowed money. | |
| Either a uniform percentage tax credit for mortgage | |
| interest or an investment credit for first-time home purchase | |
| would be a more effective home ownership subsidy. Replacing the | |
| deduction with an interest credit has been endorsed by the | |
| President's Advisory Panel on Federal Tax Reform appointed in | |
| 2005 by President Bush, the National Commission on Fiscal | |
| Responsibility and Reform, and the Debt Reduction Task Force of | |
| the Bipartisan Policy Center. Other proposed reforms include | |
| reducing the size of a mortgage qualifying for a subsidy, | |
| limiting the subsidy to a principal residence, and eliminating | |
| the subsidy for home equity. | |
| The tables in my testimony display the effects on tax | |
| burdens and average tax rates of four potential reforms: | |
| Eliminating the deduction, limiting it to interest on the first | |
| $500,000 of home acquisition debt, replacing it with a 15 | |
| percent refundable credit on the first $25,000 of eligible | |
| interest, and replacing it with a 20 percent nonrefundable | |
| credit for interest on the first $500,000 of home acquisition | |
| debt. All of these options would raise taxes the most on upper- | |
| middle-income taxpayers, and replacing the deduction with a | |
| credit would reduce tax burdens on average in all groups in the | |
| bottom 80 percent of the income distribution. | |
| The revenue gains, I should note, from all these options | |
| would be lower if introduced as part of a reform that lowered | |
| marginal income tax rates. With lower rates, eliminating | |
| deductions raises less money, but new credits would cost just | |
| as much. | |
| Proposals to pare back the mortgage interest deduction | |
| could adversely affect housing prices. Reform should be | |
| introduced slowly to avoid risks to the housing market, but | |
| transition rules would reduce revenue gains from the options | |
| and delay their benefits. | |
| In conclusion, the mortgage interest deduction is difficult | |
| to justify on policy grounds. It does little to encourage home | |
| ownership, but instead mostly encourages upper-middle-income | |
| households to buy larger and more expensive homes. Converting | |
| the deduction to a credit, placing additional limits on the | |
| amount of debt eligible for the subsidy, and denying the | |
| preference to home equity loans and second homes would result | |
| in a larger home ownership subsidy to those who might act on it | |
| at a lower fiscal cost. | |
| But any reform undertaken must take account of short-run | |
| adverse effects on housing markets. Designing appropriate | |
| transition rules that prevent market disruption, while | |
| retaining the benefits of removing or redirecting the | |
| preference, will be challenging. Thank you very much. | |
| [The prepared statement of Mr. Toder follows:] | |
| [GRAPHICS NOT AVAILABLE IN TIFF FORMAT] | |
| Chairman CAMP. Thank you very much, Mr. Toder. | |
| Ms. Gravelle, you are recognized for 5 minutes. | |
| STATEMENT OF JANE G. GRAVELLE, SENIOR SPECIALIST IN ECONOMIC | |
| POLICY, CONGRESSIONAL RESEARCH SERVICE, WASHINGTON, DC | |
| Ms. GRAVELLE. Thank you. | |
| Since the interest in housing tax expenditures is part of a | |
| general investigation of broadening the income tax base to | |
| either permit a lower rate or to prevent rates from rising, I | |
| would like to begin first with some general comments on tax | |
| reform, based on a CRS report that we did last summer. | |
| First, it is very difficult to identify base-broadening | |
| provisions in general that might allow significant rate | |
| reductions. About 30 percent of tax expenditures relate to | |
| savings incentives, such as retirement savings, exempting | |
| capital gains at death, and lower rates on capital gains and | |
| dividends, which some who are concerned about saving would | |
| probably like to retain. Others are unlikely candidates for | |
| technical reasons or because they are crucial to low-income | |
| individuals or because of particular merits or popularity and | |
| broad use. Our analysis suggested very limited possibilities | |
| for rate reduction. | |
| It is even more difficult to identify provisions that would | |
| allow significant reductions of the top rate while maintaining | |
| the current distribution of tax benefits. About 70 percent of | |
| the revisions we identified as being significant at the top, | |
| again, were related to savings. | |
| Finally, if the goal of lowering tax rates is to encourage | |
| supply-side responses, base broadening increases effective | |
| marginal tax rates in the same way as statutory rate increases, | |
| because if part of an additional dollar of income is devoted to | |
| a tax-deductible use, eliminating that deduction will raise the | |
| share of taxes paid at the margin. For example, eliminating all | |
| itemized deductions, we estimated, would allow a statutory rate | |
| reduction of the top between 4 and 5 percentage points, but the | |
| loss of deductions themselves would increase the effective | |
| marginal tax rate by about 4.5 percentage points, essentially | |
| leaving effective marginal rates unchanged. | |
| How do the primary provisions affecting housing, mortgage | |
| interest deductions, property tax deductions, and exclusions of | |
| capital gain fit into this framework? First, although their | |
| broad use and popularity may be political barriers to major | |
| revisions, many economists have criticized these provisions as | |
| distorting the allocation of resources, diverting capital from | |
| other uses, encouraging the overconsumption of housing, and | |
| treating renters differently from owner occupants. There may, | |
| however, be merits to owner-occupied housing, such as the | |
| neighborhood benefits that have already been mentioned. | |
| Perhaps more importantly, a home is an important asset in | |
| retirement. Since investment in a home is a form of automatic | |
| savings, accumulating equity as the mortgage is paid, that | |
| saving may be in part an increase rather than a substitute for | |
| other savings. If a goal of tax reform is to encourage saving, | |
| these subsidies may be justified. | |
| Finally, in terms of fairness, mortgage interest deductions | |
| increase fairness between homeowners who rely largely on | |
| mortgages and those who finance out of assets. | |
| There are some additional justifications for retaining the | |
| capital gains exclusion. Capital gains taxes on home sales | |
| discourage labor mobility by increasing the cost of relocating. | |
| They cause real lock-in effects, such as discouraging older | |
| individuals from scaling down their homes as their families | |
| become smaller or moving to rental housing, since taxpayers can | |
| avoid tax on the gain by holding their home until death. They | |
| impose taxes on certainly elderly individuals, who are forced | |
| to sell, for example, for health reasons, and not on others. | |
| And the lock-in effect, about which we know very little, may | |
| significantly reduce the potential revenue gain. | |
| Transition issues also arise for individuals who have | |
| recently acquired large mortgages, and there are also immediate | |
| concerns on the housing demand, because the economy and the | |
| housing market are still very fragile. And transition rules, as | |
| long as you know they are happening, might not do much on that | |
| demand, for preventing a reduction in that demand. | |
| Now, looking at distribution, these housing provisions are | |
| not that important relative to income for taxpayers facing the | |
| top marginal tax rates, and so they would do very little to | |
| permit those rate reductions. Also, high-income taxpayers could | |
| avoid the effects by paying off their mortgages. | |
| The same sort of marginal effects on effective tax rates | |
| and supply-side responses with the loss of deductions raising | |
| effective marginal tax rates and offsetting statutory rate | |
| reductions would also occur with these provisions, but they | |
| would take a little longer and, most importantly, they would be | |
| focused on the sort of middle-class or upper-middle-class | |
| taxpayers generally with incomes between $100,000 and $250,000. | |
| Thank you. | |
| [The prepared statement of Ms. Gravelle follows:] | |
| [GRAPHICS NOT AVAILABLE IN TIFF FORMAT] | |
| Chairman CAMP. All right. Thank you very much, Ms. | |
| Gravelle. | |
| Mr. Calabria, you are recognized for 5 minutes. | |
| STATEMENT OF MARK A. CALABRIA, PH.D., DIRECTOR OF FINANCIAL | |
| REGULATION STUDIES, CATO INSTITUTE, WASHINGTON, DC | |
| Mr. CALABRIA. Chairman Camp, Ranking Member Levin, other | |
| distinguished Members of the Committee, I thank you for the | |
| invitation to appear at today's hearing. | |
| Let me first say that I believe housing is a critical | |
| component of our economy. More importantly, I think we need to | |
| keep in mind that housing is one of the basic necessities of | |
| life. Without stable, decent, and affordable housing, many | |
| other goals in life become quite difficult, if not impossible | |
| to achieve. | |
| With that in mind, it is my opinion that our current Tax | |
| Code actually does little to help achieve these goals. I | |
| believe a Tax Code that would improve economic growth and | |
| housing affordability would ultimately be a Code with low, | |
| simple, flat rates, with few, if any, deductions. Accordingly, | |
| I would urge the Committee, as an ultimate objective, to | |
| entirely eliminate the mortgage interest deduction and the | |
| deduction for local property taxes. I would also encourage the | |
| Committee do so in a budget-neutral manner, lowering overall | |
| rates. | |
| As households have made significant investments and | |
| decisions based upon the current Tax Code, such a change | |
| should, of course, be phased in over a reasonable number of | |
| years. I would suggest no more than 7. I recognize that such a | |
| change immediately raises questions as to any adverse impact. I | |
| would be the first to agree that no policy is without both | |
| costs and benefits. There are no freebies. Before we can | |
| properly assess those costs and benefits, however, we must | |
| start from a position of understanding. | |
| As it relates to the mortgage interest deduction, we can | |
| think about, or at least I think about homeowners as broken | |
| down into roughly three near-equal-size groups. The first third | |
| is homeowners who have no mortgage at all. That is about a | |
| third of owners who own their homes free and clear, deriving no | |
| benefit from the mortgage interest deduction. I will note as an | |
| aside, prior to 1960, the majority of homeowners actually owned | |
| their homes free and clear without any mortgage at all. The | |
| second third have mortgages that are simply too small for these | |
| households to benefit from itemizing as opposed to taking the | |
| standard deduction. The last third are those who would | |
| potentially benefit from the mortgage interest deduction. These | |
| households also tend to be the most highly leveraged and the | |
| highest income households. | |
| The good news, in my opinion, from a transition is that | |
| those who currently benefit from the mortgage interest | |
| deduction are also those most likely to be homeowners with or | |
| without the mortgage interest deduction. I think the academic | |
| evidence is very clear that the mortgage interest deduction | |
| does almost nothing to increase home ownership rates. I have | |
| included in my written testimony a chart showing that changes | |
| over time in the value of the deduction have not been | |
| correlated with changes in the home ownership rate. | |
| We should also recognize that some portion of the subsidy | |
| behind the mortgage interest deduction is captured by lenders | |
| in the form of higher rates. This subsidy also differs | |
| dramatically across housing markets. In tighter markets, such | |
| as in San Francisco, the buyer gets almost no value from the | |
| subsidy, as it ends up being almost entirely captured by the | |
| seller. In looser markets there is very little price impact, as | |
| the buyer retains the majority of that subsidy. | |
| I would also argue that any price declines that result from | |
| the removal of the mortgage interest deduction would largely | |
| occur in markets where we would want housing prices to fall, in | |
| my opinion. Again, you look at San Francisco. The median house | |
| price is almost eight times median income. It is a simply | |
| unaffordable place to live by any stretch of the imagination. | |
| The Committee should also keep in mind that the value of | |
| the mortgage interest deduction increases with the level of | |
| interest rates outstanding in the economy. Quite simply, the | |
| higher our interest rates, the higher the value of the mortgage | |
| interest deduction. This also implies that the higher mortgage | |
| interest rates are the greater the impact of the mortgage | |
| interest deduction on house prices, to the extent that they are | |
| capitalized into house prices. | |
| Obviously the converse of that holds. The lower the rates | |
| are, the lower the value of the mortgage interest deduction and | |
| thus the lower the house price impact. So if we wish to | |
| minimize the impact of reducing or eliminating the mortgage | |
| interest deduction, then all else equal, we should do so at a | |
| time when interest rates are at their lowest. I would submit to | |
| you that it is pretty hard for me to believe that rates are | |
| getting lower than they are today. So if there is a time to | |
| eliminate or change the mortgage interest deduction, the | |
| optimal time would be now. | |
| We should not, of course, forget that rental properties | |
| enjoy many of the tax benefits that owner-occupied properties | |
| also get. Mortgage interest property taxes can all be expensed. | |
| The true advantage that the Tax Code offers to homeowners over | |
| renters is that rental income is taxed, whereas imputed rent | |
| that owners pay to themselves is not taxed. Economists have | |
| estimated that the value of this non-imputed taxation of | |
| owners' imputed rent is about twice the aggregate size of the | |
| mortgage interest deduction. | |
| While a handful of countries do tax imputed rent, I believe | |
| a much fairer and simpler system for achieving tenure | |
| neutrality in the Code would be to end the taxation of rental | |
| income. My back-of-the-envelope calculation is that such would | |
| score about $6 billion annually. | |
| Let me wrap up by emphasizing that extremely high levels of | |
| leverage on the part of households and financial institutions | |
| was a direct contributor to the recent financial crisis. As the | |
| mortgage interest deduction is less a subsidy for home | |
| ownership than a subsidy for home debt, its existence, while | |
| not a major driver of the crisis, was a contributor. Reducing | |
| household leverage would improve the stability of our financial | |
| system and our economy. | |
| Thank you, and I look forward to your questions. | |
| [The prepared statement of Mr. Calabria follows:] | |
| [GRAPHICS NOT AVAILABLE IN TIFF FORMAT] | |
| Chairman CAMP. Thank you very much, Mr. Calabria. | |
| Mr. Swagel, you are recognized for 5 minutes. | |
| STATEMENT OF PHILLIP L. SWAGEL, PROFESSOR OF INTERNATIONAL | |
| ECONOMIC POLICY, UNIVERSITY OF MARYLAND SCHOOL OF PUBLIC | |
| POLICY, COLLEGE PARK, MD | |
| Mr. SWAGEL. Thank you. Thank you, Chairman Camp, Ranking | |
| Member Levin, and the Members of the Committee for the | |
| opportunity to testify. | |
| In the immediate aftermath of the financial crisis, I think | |
| it was understandable for housing market participants and for | |
| the housing industry to urge that policymakers ``do no harm to | |
| housing'' or ``make no changes.'' I think that time has passed. | |
| Housing is in recovery and cannot be left on the sidelines of | |
| tax reform. Instead, housing must be part of a thoughtful tax | |
| reform that boosts growth, simplifies the tax system, and | |
| maintains progressivity. Even more, the stronger sustained rate | |
| of U.S. economic growth from reform will be an important long- | |
| term positive for housing. | |
| So I would urge that changes to the tax treatment of | |
| housing be made as part of an overall pro-growth tax reform and | |
| not as an ad hoc revenue grab to support higher spending, as | |
| unfortunately is the case in the Administration's budget | |
| proposal. | |
| Other developments will affect housing at the same time as | |
| reform, including the normalization of interest rates by the | |
| Fed, perhaps progress on housing finance reform, and other | |
| things. | |
| On the other hand, affordability remains very high with low | |
| interest rates, and the housing sector is at the beginning of a | |
| time of recovery. So even if tax reform whittles away some of | |
| the benefits that lead to a diversion of resources from other | |
| forms of investment, the housing sector and the housing | |
| recovery will continue going forward. | |
| So tax reform should address the incentives in the Code | |
| that lead Americans to purchase larger homes with more debt | |
| than otherwise and that distort the allocation of resources. | |
| This distortion reduces U.S. productivity growth and thereby | |
| reduces the growth of wages and income. | |
| As others have said, the benefits of the tax subsidies for | |
| housing accrue disproportionately to high-income families. | |
| Three out of four dollars of the tax benefits for housing go to | |
| families with incomes above the definition of the middle class | |
| put forward by President Obama's chief economist. | |
| Housing plays an important role for American families, | |
| businesses, and the overall economy, and the Code reflects this | |
| important role. As discussed in my written testimony, reforms | |
| to the mortgage interest deduction can preserve the support for | |
| housing in the Code while boosting U.S. growth and improving | |
| measures of distribution. | |
| It is not very common in economics that policy changes can | |
| improve both efficiency and equity, and that is possible here, | |
| reflecting the considerable bias in the Tax Code. And as others | |
| have said, an appropriate transition period can be put in place | |
| to smooth the impact of tax reform on housing, but the key is | |
| really to focus the tax benefits more carefully. | |
| One measure of the distortion in the economy implied by the | |
| tax subsidies for housing can be seen in a calculation of the | |
| effective tax rate for investment in different types of | |
| activities. So in 2007 the Treasury Department calculated that | |
| the tax rate on an incremental dollar of investment in housing | |
| was 3.5 percent, where the tax rate on business investment, | |
| overall business investment, was 25.5 percent. And since 2007, | |
| taxes on business investment have gone up, with higher taxes on | |
| dividends, capital gains, and higher taxes on the flow-through | |
| income of businesses. | |
| So it is vital to support housing, but it is also important | |
| to understand the disparity that the Tax Code presents between | |
| investment in housing and investment in other forms of | |
| activity, including business investment. | |
| The tax system also provides support for affordable | |
| housing. I would like to mention that very briefly in | |
| concluding. A key question that I think is worth further | |
| examination is whether the benefits that the Tax Code has for | |
| affordable housing are well targeted. In other words, do the | |
| dollars actually reach the people who most need help with | |
| affordable housing or do the benefits instead go to other | |
| parties, such as real estate developers? | |
| In general, a sound principle is for any tax subsidies to | |
| target people rather than places, and this suggests a focus on | |
| demand-side tax subsidies for affordable housing, such as the | |
| Housing Choice Voucher, the so-called Section 8 program. | |
| In contrast, the Low Income Housing Tax Credit has the | |
| potential to boost construction of affordable housing units. I | |
| think it would be useful for Congress and for the Committee to | |
| mandate careful empirical analysis--data, not anecdotes--to | |
| assess whether this is the case. And the idea is for tax policy | |
| to ensure that taxpayer resources be used in the most effective | |
| way to support the vital goal of affordable housing. Thank you | |
| very much. | |
| [The prepared statement of Mr. Swagel follows:] | |
| [GRAPHICS NOT AVAILABLE IN TIFF FORMAT] | |
| Chairman CAMP. Well, thank you very much, Mr. Swagel. | |
| Thank you all for your testimony. We are now going to move | |
| into the question-and-answer phase of the hearing, and each | |
| Member who seeks recognition will be given 5 minutes in which | |
| to ask questions and receive answers. | |
| Let me start, and I will start with you, Mr. Swagel. I just | |
| want to go over a point you made in your testimony. I mean, | |
| clearly, over the last 2\1/2\ years, this Committee has been | |
| engaged very heavily in tax reform. We have had over 20 | |
| hearings. We are determined to fix a Tax Code that many of us | |
| view as broken and really presents too much of a burden on | |
| taxpayers, it is too costly. | |
| You mentioned a pro-growth tax reform model that could help | |
| bring about general economic growth and job creation. And if | |
| that is the case, would that help the housing sector? | |
| Mr. SWAGEL. Oh, I think it would. Even if some of the | |
| benefits, such as the mortgage interest deduction, are reduced, | |
| the overall effect in boosting economic growth from reducing | |
| the tax on saving and the tax on investment in the U.S. Tax | |
| Code would boost the overall economy, and this would flow back | |
| into housing. It is hard to say, you know, that tax reform will | |
| pay for itself in the form of stronger growth, but there will | |
| definitely be a strong offset. | |
| Chairman CAMP. Mr. Calabria, do you have any comment on | |
| that? | |
| Mr. CALABRIA. I would agree. I think over time, ultimately | |
| in the long run, what should and what does drive house prices | |
| are incomes. And certainly I think one of the mistakes we made | |
| in the financial crisis was to try to get people to stretch | |
| above and beyond their means. And so to me, a pro-growth Tax | |
| Code is going to be one that increases labor productivity, | |
| increases wages, increases incomes, and makes housing more | |
| affordable by making people wealthier, not making them more | |
| indebted. | |
| Chairman CAMP. There has been some testimony, Mr. Toder, | |
| particularly yours, on the importance of transition rules with | |
| regard to any tax changes, or, you know, for the tax benefit | |
| regarding housing. Can you kind of elaborate a little bit more | |
| on that in terms of why transition rules are important? And do | |
| you have any recommendations on specifics of how transition | |
| rules should work? | |
| Mr. TODER. Okay. I wish I had thought about that a little | |
| bit more before throwing it out there. But part of the reason I | |
| did make that comment, there are studies out there which show | |
| fairly substantial effects on house prices of, for example, | |
| removing the mortgage interest deduction. | |
| They may not be as serious as those studies show. Interest | |
| rates are very low today. There are other people moving into | |
| the market who are not affected by the mortgage interest | |
| deduction. So I think they may be exaggerated, but nonetheless, | |
| we have had a very fragile housing market, as you know, and big | |
| losses. That has affected the construction industry, it has | |
| affected employment. And I think at this time, with the | |
| recovery a little fragile, you have to be a little bit careful | |
| about taking away those props. | |
| So whether this happens through gradually phasing out | |
| elimination of the deduction or grandfathering it for existing | |
| owners, there are a lot of different ways of doing this. | |
| Chairman CAMP. Sure. | |
| Any thoughts on transition rules, Mr. Calabria or Mr. | |
| Swagel? | |
| Mr. SWAGEL. Sure. Transition rules are important, and one | |
| could imagine phasing in the reduction of the mortgage interest | |
| deduction. I wanted to mention, it is possible to go too far | |
| also. Imagine a transition rule that entirely excludes existing | |
| homes and says, you know, only new homes won't have the | |
| mortgage interest reduction. Well, that will reduce the supply | |
| of new homes and could actually give a benefit to old homes. So | |
| anyone with an existing home could be better off. So the | |
| transition rules are really important. It is just as important | |
| to get that balance so that everyone is going to have to | |
| contribute something in tax reform. | |
| Chairman CAMP. Sure. Mr. Calabria. | |
| Mr. CALABRIA. Certainly there is a tradeoff, in my mind, | |
| between a reasonable phase-in, which I think is important--as I | |
| mentioned in my testimony, people have made investments based | |
| on this--versus simplicity. So I would, maybe to parse out | |
| something that Phil said, I would have the phase-in targeted to | |
| the person and the mortgage rather than the house. We know, for | |
| instance, historically the median life of a mortgage is about 7 | |
| years. So I think in this interest rate environment, it will | |
| probably be closer to 8 or 9, but having this, the mortgage you | |
| have today, or if you have it already on the books, remain | |
| deductible, you could have some sort of glide path where that | |
| diminishes over time, but with somewhat new mortgages coming on | |
| in the future. | |
| I will emphasize again the value of the deduction is | |
| related to the value of interest rates and the economy. And, | |
| again, they are not going to get any lower, they are only going | |
| to get higher. My point would be this will only get more | |
| difficult in the future, so doing it earlier rather than later. | |
| Chairman CAMP. All right. | |
| And, Mr. Fleming, any thoughts on this idea of pro-growth | |
| reform and sort of the idea of general economic growth and job | |
| creation, what that might mean in the housing sector? | |
| Mr. FLEMING. Yes. I agree with what has been said. You | |
| know, a better growing economy, particularly with broad-based | |
| income growth, is helpful to the housing market. That is how | |
| people buy homes. That is how house prices rise in the longer | |
| run. | |
| And this is a very sticky wicket in the sense of, with all | |
| the deductions and the transition rules, in that, for example, | |
| a lot of the studies we look at look at the user cost of | |
| comparing renting to owning. But a lot of people don't just | |
| consider user costs. It is not a purely financial decision to | |
| buy a home, right? I mean, much as we economists like to | |
| believe that we act individually, financially, rationally, I | |
| don't know that that is often the case, and that we don't have | |
| a lot of other driving forces. And that is really what is | |
| behind this. | |
| If you incorporate user cost, which is where the tax policy | |
| is interacting and adjusting user costs to the benefit of home | |
| owning over renting, it is influential in the decision of | |
| tenure choice. You know, the studies have shown empirically it | |
| is influential, but it is not the only influential thing. Other | |
| things just as important are your overall income level. That is | |
| where the economy would flow in. What your marital status is, | |
| what your family size is. There are many other factors, as we | |
| know. | |
| It also shows, and some of the best economic research I | |
| have seen are these models that sort of take those decisions | |
| into two parts, which is the choice to buy or rent, and then | |
| once you have made the choice to buy, then it is a question of | |
| how much. Now, it also shows that it influences the ``how | |
| much'' component. | |
| So the question, I think, always gets back to, what is our | |
| public policy goal? Is it simply to spur home ownership? Is it | |
| home ownership in combination with increased investment in | |
| housing, which is where it stands today? I mean, we need to | |
| start with what the public policy perspective and goal is in | |
| the very first place before we attempt to redesign and figure | |
| out how to do the transition. | |
| Chairman CAMP. Okay. Thank you. | |
| And I just want to note that in terms of tax expenditures, | |
| 40 percent of the base broadening in the 1986 Act did not | |
| involve tax expenditures. So tax expenditures are not the only | |
| way of base broadening in order to lower rates as we go | |
| forward. | |
| So with that, I would recognize Mr. Levin. | |
| Mr. LEVIN. Thank you. Welcome. I am glad we are having this | |
| discussion. | |
| You know, I think everybody favors economic growth. I do | |
| think we need to look at prior periods of economic growth when | |
| there was a dramatic increase of home ownership in this country | |
| and to take a look at the role that the mortgage interest | |
| deduction played. My guess is, if you go into a middle-class | |
| area like I represent, more or less, more than less, I think | |
| you would have testimony from people who bought their homes in | |
| the 1950s, 1960s, and 1970s as to the importance of the | |
| mortgage interest deduction. | |
| And it is interesting, Mr. Calabria, I think you mentioned | |
| a third are without a mortgage. I think we need to know how | |
| many of the people in that third paid off their mortgage over | |
| the years, and not just say a third. | |
| I have this chart as to who uses the mortgage interest | |
| deduction. I think we need to take into account the President's | |
| proposal relating to a cap of 28 percent. It would mostly | |
| affect those with income over $200,000. And it is interesting, | |
| of those with income between $100,000 and $200,000, it appears | |
| about two-thirds itemize and use the mortgage interest | |
| deduction. That is 14 million of 22-plus million. So we are | |
| talking about a major policy impact. And for those with income | |
| between $75,000 and $100,000, of the 16.5 million, over 6 | |
| million use the mortgage interest deduction. | |
| I think we need to be very careful. And when we talk that | |
| this is mostly a high-income deduction, that is sometimes said, | |
| it really challenges us to look at what we mean by high income, | |
| because I think people who are making between $50,000 and | |
| $200,000, most of them are comfortable, I don't think they | |
| would call themselves high-income wage earners. | |
| So I would like to ask, Ms. Gravelle, you mention in your | |
| testimony that as to tax expenditures and their elimination, | |
| the | |
| tradeoff ``may be more apparent than real when considering the | |
| supply-side effects, such as labor, supply and saving.'' If you | |
| could elaborate on what you mean by that. | |
| Ms. GRAVELLE. Well, basically, if I am going to earn an | |
| extra dollar and, say, I am paying 5 percent of that, say in | |
| State and local income taxes to take a simple example, and get | |
| a deduction for it, if I lose that deduction that is going to | |
| raise my effective marginal tax rate. | |
| Well, every tax expenditure, virtually, except those for | |
| very low-income people, has those relationships to income. So | |
| if I spend an additional dollar and some tax-favored spending | |
| is part of that dollar, taking that away is no different from | |
| raising the statutory rate. It varies across the income | |
| classes, but what it means is that if you are thinking about | |
| trading up most base broadening for rates, you are not going to | |
| change the effective tax rate that affects labor supply or | |
| savings or entrepreneurship or whatever you are looking for. It | |
| is just not there in the works. | |
| And if you do dynamic scoring based on statutory tax rates, | |
| you will greatly exaggerate, probably greatly exaggerate any | |
| growth effects. In fact, there might not be any growth effects, | |
| depending on what kind of subsidy you are talking about. | |
| Mr. LEVIN. Okay. My time is almost up. I just want to say, | |
| I think, Mr. Swagel, it is true that the tax rate on investment | |
| is higher than on home ownership. I just think we need to be | |
| careful when we make those comparisons to take into account | |
| what home ownership has meant in this country. And we need to | |
| take a look at other countries which have had high rates of | |
| home ownership to see what the structures are there which | |
| perhaps encouraged home ownership. I think we need to be really | |
| careful when we make comparisons of any kind on this. | |
| Chairman CAMP. All right. Mr. Johnson is recognized for 5 | |
| minutes. | |
| Mr. JOHNSON. Thank you, Mr. Chairman. Thanks for holding | |
| this important hearing on tax reform and residential real | |
| estate. And also, Mr. Chairman, thank you for asking me to | |
| serve as Chair of the Real Estate Working Committee. I very | |
| much enjoyed working with the Vice Chair, the gentleman from | |
| New Jersey, Bill Pascrell, and we had our fill of meetings on | |
| real estate. | |
| So I don't know if you guys can tell us any more than we | |
| have been hearing over the past 4 weeks or not, but I met with | |
| local homebuilders in my district, we met with them up here in | |
| Washington, we met with the realtors in both places. And I was | |
| once a homebuilder, so I understand the important role housing | |
| plays in our economy. At the meeting, one of the things I heard | |
| was that it would be more difficult for folks, especially | |
| first-time home buyers, to get a mortgage if the mortgage | |
| interest deduction was significantly cut back or eliminated | |
| entirely. | |
| Mr. Calabria, as someone who knows a thing or two about | |
| housing and who supports getting rid of the mortgage interest | |
| deduction, I would like to hear from you whether you think | |
| there is any truth to what I heard from the homebuilders, in | |
| that it would be more difficult for folks to qualify for | |
| mortgages if the deduction was cut back in some way or | |
| eliminated. | |
| Mr. CALABRIA. I think it depends on what you assume about | |
| house prices. And, you know, I think you will hear on the | |
| second panel, you have heard here that if we get rid of it, | |
| house prices will come down. And so I want to go to the point | |
| that the Ranking Member raised, which is I as a homeowner, if | |
| the choice given to me was would I like to pay a little bit | |
| less for that house or would I like to have the mortgage | |
| interest deduction and those two cases leave me equal payments, | |
| I would rather pay less for the house, quite frankly. | |
| I think it is not going to be any harder, because prices | |
| will come down, which means people have to save less to buy | |
| that house. So, again, there are going to be price effects, but | |
| I think that is actually a plus, not a minus. | |
| Mr. JOHNSON. Well, as a builder, we never include that as | |
| part of our computation. You know, you build a house for X | |
| amount of dollars and you put the profit on there and you | |
| charge the people that price, and it doesn't make any | |
| difference what the deduction is. | |
| Mr. CALABRIA. And I would certainly agree. As a builder or | |
| realtor, you have to take the market as a given, you know, | |
| because you don't necessarily drive the market, but the overall | |
| interest deduction does drive the market to a degree. | |
| Mr. JOHNSON. Mr. Toder, your thoughts on that same | |
| question, please. | |
| Mr. TODER. Well, you know, from people I have talked to, | |
| and maybe someone else can contradict this, I am not aware of | |
| banks, and I have dealt with several lately, asking anybody | |
| what their tax situation is when they are applying for a loan. | |
| They want to know your wealth, your income, your assets, but | |
| whether you are benefitting and how much from the deduction is | |
| not something that ever gets on the form, so I am not quite | |
| sure how it---- | |
| Mr. JOHNSON. No. They want to know if you can afford the | |
| payments. | |
| Mr. TODER. Yeah. | |
| Mr. JOHNSON. Okay. Thank you. | |
| Mr. Calabria, later on we will be hearing from Gary Thomas, | |
| the President of the National Association of Realtors. And in | |
| his testimony, he argues that the tax system supports home | |
| ownership by making it more affordable. So is Mr. Thomas wrong | |
| here, or do you think the mortgage interest deduction inflates | |
| home prices? You have said it does, I guess. | |
| Mr. CALABRIA. I think the mortgage interest deduction | |
| inflates home prices by a degree. I also think it is important | |
| to parse out, you know, the mortgage interest deduction is a | |
| subsidy for debt, not home ownership. We can come up with a | |
| variety of ways. I would argue if we want to subsidize home | |
| ownership, we should be subsidizing home equity. Give | |
| households something to pass on, not debt. | |
| So, again, part of my objective here is not to change | |
| effective tax rates or not to change home ownership rates, but | |
| to change the amount of leverage and indebtedness we have in | |
| the system so that households have real wealth in that house, | |
| not just a big mortgage. | |
| Mr. JOHNSON. So in other words, you believe repealing the | |
| mortgage interest deduction would reduce home prices. How much | |
| do you think it would reduce them? | |
| Mr. CALABRIA. Let me first say, it depends on the markets. | |
| I think if you looked at someplace like Houston, where it is | |
| incredibly easy to build, there will be zero price impact. You | |
| look at someplace like San Francisco, and I think prices will | |
| come down something like 10 percent. So it really depends on | |
| how tight the supply is in that market. You are not going to | |
| see a uniform impact. | |
| I would also add, it is my belief the prices will come down | |
| in markets that are, in my opinion, way overpriced as it is. | |
| So, again, there is not going to be an impact in most of Texas. | |
| Mr. JOHNSON. Yeah. I think I agree with you. | |
| Mr. Toder, do you care to comment on that? | |
| Mr. TODER. I agree. I think it is just very variable. I | |
| think probably there will be some impact immediately in all | |
| markets, because it is hard for housing to adjust immediately, | |
| but that will be very, very variable across markets. | |
| Chairman CAMP. All right. Thank you very much. | |
| Mr. Rangel is recognized. | |
| Mr. RANGEL. Thank you, Mr. Chairman, for calling these | |
| hearings. | |
| Ms. Gravelle, could you expand on the idea that if we | |
| reduce the top rate and broaden the base, that it could be a | |
| disadvantage to moderate and higher--it could be an advantage | |
| for the moderate--it could be an advantage for the higher | |
| income, but moderate and middle-income people could be | |
| adversely affected? | |
| Ms. GRAVELLE. Well, if you want to achieve some of the rate | |
| reductions at the top that have been talked about, like going | |
| to, say, 25 percent, it is very hard to see a way to do that | |
| through tax expenditures or even--there are not that many | |
| nontax expenditures you can think of for individuals, either. | |
| So if you lower those rates and then do tax reform, and it | |
| is revenue neutral, then you would have to raise the tax burden | |
| on the middle class or low-income people. You know, there are | |
| only so many pieces of this puzzle. So either you can't lower | |
| those top rates with base broadening or people at higher | |
| incomes get a reduction in their tax burden and somebody else | |
| has to pay for it. | |
| Mr. RANGEL. Well, the theory that most of us use is that | |
| there are some preferential treatments that are given to | |
| individuals and corporations that if they ever had a reason for | |
| being, it no longer exists, and that the system is unfair, and | |
| that by eliminating what some call loopholes or others call | |
| unnecessary incentives, that this would give us the funds to | |
| reduce the rates without having a severe impact on the | |
| incentives that we talk about here. | |
| So one person's loophole is another person's incentive, but | |
| basically speaking, you are saying that you could not reduce | |
| the top rates to 25 percent, even eliminating the so-called | |
| loopholes, that it would adversely affect the moderate and | |
| middle income because we will be taking away from them tax | |
| benefits that they now enjoy? | |
| Ms. GRAVELLE. If you are willing to raise the tax on | |
| capital gains to ordinary rates and change the scoring for | |
| that, that the Joint Tax Committee does, without big behavioral | |
| responses, if you are willing to tax capital gains at death, if | |
| you are willing to tax defined benefit pension plans and | |
| 401(k)s, there are some things there. What I am saying is I | |
| think most of those things are things that the people are | |
| interested in trying to retain in a tax reform that will | |
| accommodate growth, they are not some of the things they want | |
| to do. So if you take those off the table you have very little | |
| left. | |
| Mr. RANGEL. So basically what you are saying is that, | |
| politically, we would not be closing the so-called loopholes in | |
| order to raise the type of revenue that would be necessary to | |
| lower the top rates. | |
| Ms. GRAVELLE. Unless you are willing to go after those | |
| kinds of provisions. | |
| Mr. RANGEL. It's just that, you know, every time we talk | |
| about closing loopholes we get support from the Republicans | |
| until we try to do it. Then they say we are raising taxes on | |
| those people that we thought was equity. And then we have some | |
| people out there saying that they don't want any more revenue | |
| because more revenue means tax increases. | |
| We have to find what you have said, which is clear, that if | |
| you are going to close loopholes or bring equity to the system, | |
| somebody is going to get hurt. You can call it just treatment | |
| under the Code or you can say they have to pay more taxes. But | |
| your statement is based more on the political will to do what | |
| we have to do than the fact that we can raise the money if we | |
| had the will to do it. | |
| Ms. GRAVELLE. Well, it is not just political will. It is | |
| whether you think there are merits. I think there are a lot of | |
| difficulties in taxing capital gains at death, for example, or | |
| imputing incomes from defined pension plans. So we laid out all | |
| of those. Some of it is practical. Some of it is provisions of | |
| merit. Some of it is political. But it all looks to us very | |
| difficult to come up with the base broadening that you would | |
| need, particularly at the top. | |
| Mr. RANGEL. Thank you. | |
| Chairman CAMP. Thank you, Mr. Rangel. I certainly | |
| appreciate your comments but I think we will let the Committee | |
| have a try on how difficult this will be. | |
| Mr. RANGEL. That is all right. | |
| Chairman CAMP. Mr. Tiberi is recognized for 5 minutes. | |
| Mr. TIBERI. Thank you, Mr. Chairman. Mr. Calabria and Mr. | |
| Swagel, I found your testimony fascinating. I didn't agree with | |
| it all, but found it fascinating. Mr. Calabria, I love your | |
| last name by the way. You make a great point that is not often | |
| made in your written testimony on page 3: It should be | |
| emphasized that the deductibility of mortgage interest and | |
| property taxes is not exclusively to homeowners, in that | |
| landlords can also expense these items as well as claim a | |
| depreciation allowance for rental properties. | |
| Here is the point. And I don't think you realize you made | |
| this point. If I own rental property and my taxes go up, I | |
| increase rents. If you take this away--not you, we--if we take | |
| this away from an owner of rental property, you don't think | |
| rents are going to go up? They are. I am not going to allow you | |
| to answer, because I have to tell you I own property and they | |
| are. They are going to go up. That wasn't a question. That | |
| wasn't a question. | |
| And so here is another point I wanted to make and then I | |
| will let you guys shout if we have any time left. Mr. Swagel, | |
| higher income households tend to purchase larger homes with | |
| greater home mortgage debt and thus receive larger tax | |
| subsidies. You forgot to mention the AMT. The more people, | |
| taxpayers, have deductions and credits, the more they have | |
| higher income, higher mortgage interest deduction, higher | |
| property taxes, higher deductions on their return, the more | |
| likely they are going to be subject to the AMT. And I am | |
| painfully aware of that. | |
| So the other point that you both made was with respect to | |
| higher income. The data that I have in front of me from Joint | |
| Tax from 2004 show that 75 percent of the mortgage interest | |
| deduction benefit was collected by those earning less than | |
| $200,000. And the majority of those earning less than $200,000 | |
| made less than $100,000. And I would argue--I don't have the | |
| stats for this--the closer you are to $200,000, the more likely | |
| you are going to be subject to the | |
| AMT, which will, again, mean you are going to be paying more tax | |
| es. | |
| My final point deals with theory versus reality. As | |
| somebody on the street who was a realtor, I will tell you my | |
| bias. I was a realtor. Never once did I have a client say to | |
| me, Pat, I want to buy this house because I can get a higher | |
| mortgage interest deduction or I want to buy this house because | |
| the property taxes are higher. Actually, people wanted to go | |
| where property taxes were lower. Even if they were actually | |
| itemizing their deductions, they didn't say, boy, I want to go | |
| pay more taxes so I can deduct more of my income. I have never | |
| seen that behavior as a realtor. | |
| One more point and then I would love to have maybe your | |
| thoughts, both of you, Mr. Swagel in particular, you mentioned | |
| the low-income housing tax credit. As a Republican I would | |
| argue if you look at all the housing policy that the Federal | |
| Government does, and unfortunately Mr. Camp doesn't have | |
| jurisdiction over all of it. We only have jurisdiction over | |
| some of it. Whether it is at HUD, whether it is Section 8 | |
| housing--I'm very familiar with both programs--or whether it is | |
| the low-income housing tax credit, as someone who tilts to the | |
| right from your testimony, why wouldn't we be encouraging | |
| public-private sector support? Maybe the amount is wrong, maybe | |
| the subsidy is wrong, but isn't it a good thing to get the | |
| public and private sector working together, which is exactly | |
| what the low-income housing tax credit does? It gets the best | |
| of both worlds. It has the Federal Government involved. It has | |
| the private sector involved. It has nonprofits involved. | |
| In my community, I have to tell you, if you and I went to | |
| tour housing for low-income people in my community in central | |
| Ohio and you looked at HUD property and you looked at Section 8 | |
| property and you looked at low-income housing tax credit | |
| property, there is no comparison in terms of what is the best | |
| managed, the best utilized, the best housing for low-income | |
| individuals. | |
| And I take issue with the fact that we don't have low- | |
| income housing. I can give you a property in my district on | |
| Livingston Avenue that has homeless veterans transitioning in | |
| their lives in property. They went literally from the streets | |
| into low-income housing tax credit property into the workforce. | |
| It is a fabulous, fabulous property. Go ahead. | |
| Mr. SWAGEL. I would say the goals of both the mortgage | |
| interest deduction and the low-income housing tax credit are | |
| laudable and I fully support the goals. The question, as I have | |
| written in my testimony, is the targeting. And it is an open | |
| question in the economics literature for the LIHTC how | |
| effective it is. Do the benefits of this taxpayer support, to | |
| what extent do they result in new units? | |
| Mr. TIBERI. Help us improve it. Help us improve it. | |
| Mr. SWAGEL. That is exactly it. | |
| Chairman CAMP. The time has expired. Mr. McDermott is | |
| recognized. | |
| Mr. MCDERMOTT. Thank you, Mr. Chairman. Russell Long, the | |
| old Finance Chairman in the Senate, once said that tax policy | |
| is ``Don't tax you, don't tax me, tax the guy behind the | |
| tree.'' I appreciate you having this hearing because I think we | |
| need to wake up the people because they are the people behind | |
| the tree in this one. | |
| And Ms. Gravelle, Mr. Calabria and Mr. Toder concede that | |
| the elimination of the mortgage interest deduction would reduce | |
| housing prices. They seem to think it might be a good thing | |
| since it would lower cost presumably for new buyers. | |
| Now, we already heard that 70 percent of the people who get | |
| this deduction are making less than $200,000. And I want to | |
| know how such a policy would affect seniors or people who are | |
| soon to retire who may have a significant portion of their | |
| savings in their house. To see their house drop by 10 percent | |
| or whatever, we don't know, we are just guessing how much | |
| percentage. In Seattle they dropped about 30 percent in 2007. | |
| So we don't know what is going to happen. | |
| But we are setting in motion a policy to pay for a | |
| reduction in corporate taxes down to 25 percent by taking it | |
| away from homeowners and people who were told by their father, | |
| as everybody on this dais was and practically half the people | |
| in the audience, when you get a chance, buy a house. Everybody | |
| in this country was told that. And some make it and some don't. | |
| So what happens to those people? | |
| Ms. GRAVELLE. Well, in every transaction on the demand side | |
| there is somebody on the supply side and if we use housing that | |
| is the seller. Clearly, if house prices fall the people who are | |
| selling their houses are going to lose money from that. I would | |
| say, though, I am not convinced there is going to be a large | |
| effect, at least not in the long run. We are talking about | |
| permanent tax policy. Simply because in the long run the supply | |
| curve for housing is probably pretty flat, the only thing that | |
| would have an effect would be land. Maybe land would have an | |
| effect. | |
| But in the short term, the people who are within the few | |
| years while the market is adjusting, yes, it is going to be | |
| like a one-time--if you have a price fall it would also be | |
| partly a one-time hit to them as well as a hit to the demanders | |
| who are having a direct tax reduction. | |
| Mr. MCDERMOTT. Suppose this Committee decided that we would | |
| allow you to have a deduction for interest on any loan under | |
| $300,000. How would that affect the country? I mean, I look at | |
| the loan amounts State-by-State and all of the ones who are in | |
| the top 14, with the exception of North Dakota and Utah, are on | |
| the coast. They are either Hawaii, Washington, Oregon, | |
| California or you start down the east coast and you get all the | |
| way down to Virginia. So what would happen if we set a cap? | |
| Let's say we will allow you a deduction up to $300,000? | |
| Ms. GRAVELLE. Well, that is the proposal people are talking | |
| about now, lowering the cap. I mean, it just depends on where | |
| in the income distribution you want to constrain this benefit. | |
| So if you lower the cap to $300,000--mortgage interest you are | |
| talking about--then you are going to have a smaller part of the | |
| community of homeowners having a marginal deduction. | |
| One of the problems, though, with these caps on deductions | |
| is they kind of worsen the problem that I talked about. I mean, | |
| you are creating essentially a bigger inframarginal benefit. So | |
| you are going to have more marginal tax that is sort of raising | |
| effective tax rates at the margin to trade off against the | |
| rates. But, basically, that is distributional. Right now the | |
| limit is $1 million and you will reduce substantially the | |
| benefits of the upper-middle-income-class individuals. And you | |
| would retain benefits for say the $75,000, $100,000, those | |
| kinds of taxpayers. | |
| Mr. MCDERMOTT. Yes, go ahead. | |
| Mr. CALABRIA. I want to make two quick points which, as I | |
| suggest in my testimony, I think we can do in a way where the | |
| same households who would be losing the mortgage interest | |
| deduction also see a corresponding decline in their tax burden | |
| so that we can construct this in a way that those households | |
| are held harmless tax wise. | |
| And, second, let me say, you know, on average | |
| overwhelmingly homeowners are wealthier than renters. And so to | |
| me, I think if we made it easier for renters to buy at the | |
| expense of households, that reduces wealth inequality, which is | |
| something I think we are concerned about. | |
| Mr. MCDERMOTT. We are talking about simplifying the Code, | |
| aren't we? And you are talking about adding 53 more pages to | |
| talk about this tradeoff between--I don't see how you make it | |
| simpler for the average person. For instance, John and I both | |
| got extensions. | |
| Chairman CAMP. Thank you. Mr. Reichert is recognized. | |
| Mr. REICHERT. Thank you, Mr. Chairman. Thank you for being | |
| here with us today. | |
| All of us in this room, and across the country recognize | |
| how difficult it is going to be to accomplish tax reform. But | |
| the process that we have been going through over the last | |
| couple of years now has been one of the most open. And I am | |
| only--this is my ninth year in Congress. I had a career prior | |
| to arriving here. But in my tenure here this has been one of | |
| the most open and transparent processes that I have been | |
| engaged in and I think most Members of this panel will agree | |
| with that. | |
| As the Chairman mentioned, we have had over 20 hearings | |
| regarding tax reform, all aspects of tax reform. One hearing | |
| associated with the working group that I work on--that I co- | |
| chair on tax exempt organizations--one hearing was 8 hours, 42 | |
| witnesses just a month or so ago. We have had working groups | |
| with hearings and discussions, open to all the Members here on | |
| this panel and open to all of you and the public. | |
| We have had discussion papers issued for people to review, | |
| open and transparent and all recognizing that we need to do tax | |
| reform. | |
| And this political rhetoric from an old cop's perspective | |
| is really becoming tiring. What we need to do is work together | |
| for the American people to make sure that the tax law works for | |
| them, that we are not continually taking away from the American | |
| worker, from the hard working citizen every day. They need a | |
| simpler tax form. They need a fairer tax form. And I think, | |
| again, every Member of this panel would agree with that. | |
| So to throw political bombs every time we have one of these | |
| hearings is becoming pretty hard to stomach from my point of | |
| view. | |
| I know there are people listening today across this country | |
| who, when they see this on some sort of a rerun sometime this | |
| evening, are thinking, you know, I am a family and I am looking | |
| to buy a home. My first home. Or if I have now owned my home | |
| for a while and am a family that has been able to work up the | |
| ladder, the economic ladder, and now I want to buy a second | |
| home. Or later in life, now over 60 like I am, maybe I am | |
| thinking about buying or selling my home and how does that | |
| affect me as I exit the home market, the discussion we are | |
| having? | |
| So, for at least these three points, the first home buyer, | |
| the family looking to buy a second home, or we have someone who | |
| is nearing retirement and looking at maybe selling their home, | |
| can you tell me how the mortgage interest rate deductions | |
| affect all of the families that I have just mentioned in each | |
| situation? Mr. Swagel, would you care to comment, please? | |
| Mr. SWAGEL. Sure. I would focus on the first one that you | |
| mentioned, because I think it is critically important to | |
| support the goal of home ownership and getting people from | |
| rental to home ownership. And mortgage interest deduction | |
| helps, it is just the benefits of that are mainly to people who | |
| don't need the help. I mean, it is the structure of our Tax | |
| Code. Most first-time home buyers are not spending a million-- | |
| don't have a mortgage of a million dollars. We subsidize a | |
| million dollars, 1.1 including home equity. So the first-time | |
| home buyer gets help. Probably most of the benefits go to | |
| people who are not in that category. | |
| If we are exiting then, if we are someone who exits home | |
| ownership and goes into rental, they are losing the tax | |
| benefit. For many people home ownership as they age isn't the | |
| right thing. And if this were providing them an incentive, the | |
| tax system is biasing their choices. To me, that is the biggest | |
| problem. We don't want the tax system to tell people what to do | |
| or to bias them on what to do. And I think that is the case. | |
| Mr. REICHERT. If you have a senior, for example, my father- | |
| in-law has just sold his home. His spouse, my mother-in-law, | |
| passed away 3 years ago. He sold his home and guess who he is | |
| moving in with. But he has been able to pay off his home. So we | |
| tax his income, income that he could use from that home to help | |
| subsidize his retirement, medical bills, et cetera, that he | |
| might have. That doesn't make sense to me that the government | |
| is going to take away from a prudent man who has worked hard | |
| his entire life who is 88 years old. We are now going to take | |
| away some of his ability to pay for his retirement. Does that | |
| make sense to you? | |
| Mr. SWAGEL. I actually support the exemption for capital | |
| gains, the capital gains exemption. | |
| Chairman CAMP. All right. We will have to leave it at that. | |
| Mr. Lewis is recognized. | |
| Mr. LEWIS. Thank you very much, Mr. Chairman. And thank you | |
| so much for holding this hearing. I want to thank all of the | |
| witnesses for being here. | |
| Ms. Gravelle, since the stock market crashed in 2008, my | |
| district in Metro Atlanta has been troubled with foreclosures. | |
| I want to go to what Dr. McDermott implied. Communities and | |
| families were turned upside down and there are still many of | |
| these families in the communities and neighborhoods that are | |
| troubled. | |
| In 1944, when I was only 4 years old, my father had saved | |
| $300. He bought a house, a home. He had been a share cropper. | |
| Bought a house and 110 acres of land. I know this is not 1944, | |
| but is it right, is it fair, would it be just for us to say to | |
| a working family, to a middle-class family that we are going to | |
| snatch the rug from under you? | |
| We have been told over and over again buy a piece of the | |
| rock. Own your little piece of land. Own a house. The Federal | |
| Government should be about helping, caring. Could you comment? | |
| Ms. GRAVELLE. Well, I think--first of all even though there | |
| is only about a third of people who use the mortgage interest | |
| deduction, two-thirds of people, families have their homes. | |
| And, as I said, I think one important issue to keep in mind is | |
| this is an asset for middle-class families. They have---- | |
| Mr. LEWIS. It is a major investment for middle---- | |
| Ms. GRAVELLE. If we look at the data we see one of the ways | |
| that people save is by acquiring a home. And whether they sell | |
| that home or whether they have a home that they don't have a | |
| mortgage on when they retire, either one of them helps in their | |
| retirement benefit. | |
| So I think that is something to take into account. A lot of | |
| economists are very critical of the mortgage interest deduction | |
| for a lot of the reasons I have heard here and I am certainly | |
| aware of those. But I do think that is an important issue. And, | |
| by the way, my daddy was a share cropper too, and I came from | |
| Georgia, so we have some things in common here. | |
| Mr. LEWIS. Thank you. Well, you understand. | |
| Ms. GRAVELLE. I understand poverty. | |
| Mr. LEWIS. Thank you very much. I yield back. | |
| Chairman CAMP. Thank you. | |
| Mr. Roskam is recognized. | |
| Mr. ROSKAM. Thank you, Mr. Chairman. I just want to thank | |
| the panel. I feel like Tevye here in Fiddler on the Roof. On | |
| the one hand and on the other hand. I could listen to you talk | |
| for quite a while because I am finding myself learning things | |
| and that is what hearings are for. So thank you for your | |
| testimony and the sincerity with which you are approaching | |
| this. | |
| Mr. Calabria, a question for you as it relates to | |
| transitions. Let's assume for the sake of argument that there | |
| is a sunset on the home interest deduction. How do you | |
| contemplate a good transition, a good set of transition rules, | |
| or how does that play into somebody that has operated on an | |
| assumption, that is a reasonable assumption, and that is hey, | |
| this thing is here to stay and they take on a 30-year | |
| obligation? What is the transition that is reasonable and fair | |
| and doesn't pull the rug out from underneath the taxpayer? | |
| Mr. CALABRIA. Let's start with the observation that it is a | |
| 30-year obligation, but the median life of a mortgage has | |
| historically been about 7 years. And in this interest rate | |
| environment I think it will be closer to 8 or 9 because people | |
| are less likely to want to get a new mortgage with these low | |
| rates that they have today. With that said, the transition | |
| window doesn't need to be 30 years. I think 7 or 8 would be the | |
| outside transition window that I would have. | |
| But you certainly could say whether you have a mortgage | |
| today versus people getting new mortgages coming in, I do think | |
| there are ways to make people held harmless. | |
| I also would note for families under $100,000 in income, | |
| the average I believe they are getting is about $200 in value | |
| annually from the mortgage interest deduction. For these | |
| families you could certainly just increase the standard | |
| deduction by $200 or $300 and they are held harmless post tax | |
| wise. | |
| So part of this question is do you hold them harmless on | |
| their mortgage? Do you hold them harmless on their tax burden? | |
| And so I think we could actually do this simply. Because you | |
| could certainly do it through standard deductions. You could do | |
| it through other ways that are not all that complicated. Of | |
| course you can also do it in complicated ways. | |
| Again, I would not have a transition period that goes for | |
| more than 7 or 8 years tops. But I think you can front load | |
| that in 3 or 4 years and most of the benefits and most of the | |
| costs would be there. But, again, I want to emphasize I believe | |
| it should be done in a budget neutral way where you are leaving | |
| the same families more or less the same after tax. They are | |
| just not tied to their mortgage. | |
| Mr. ROSKAM. I understood everything you just said. What | |
| about the person, though, that isn't part of the average or | |
| isn't part of the mean, they are outlier and they tend to write | |
| their Members of Congress, and they say, look, you know I have | |
| a 30-year mortgage. So are they pressing their nose up against | |
| the glass looking in or do they get accommodated somehow? | |
| Mr. CALABRIA. Again, the question is whether you want to | |
| hold them harmless on the house, which, again, only matters in | |
| tight housing markets. In places like Houston there is not | |
| really going to be a long-run price impact. Are you going to | |
| hold them harmless after tax? Now, I think you could hold them | |
| harmless after tax by again looking at things like whether you | |
| want to give a special deduction for your homeowner. And if you | |
| want to subsidize ownership, you can give a deduction for a | |
| homeowner whether they have a mortgage or not. | |
| My primary point here today is that if we care about home | |
| ownership, we should not be tying it to a mortgage, we should | |
| be tying it to home ownership which, again, I am skeptical | |
| whether the benefits outweigh it but, again, that is what the | |
| discussion should be about, not about having a bigger mortgage. | |
| Mr. ROSKAM. The phrase that you used during your testimony | |
| or during one of the responses, you said give households | |
| something to pass on, not debt. What did you mean by that? | |
| Mr. CALABRIA. If I want to have a variety of ways to try to | |
| get people into home ownership, certainly some sort of matched | |
| down payment assistance could be a direction. If you want to | |
| help them try to build equity--I will use myself, I live in the | |
| District of Columbia so, unsurprisingly, I have a large | |
| mortgage. I think what bothers me is the fact that--and, again, | |
| I don't want to paint myself as representative, but I would | |
| like to pay more of it down. But the fact that I will be | |
| penalized by the Tax Code for reducing my own leverage strikes | |
| me as ridiculous. It is making me make bad decisions. | |
| Mr. ROSKAM. Thank you. I yield back. | |
| Chairman CAMP. Mr. Neal. | |
| Mr. NEAL. Thank you, Mr. Chairman. Thank you to the | |
| panelists. There are few items in economics that touch every | |
| aspect of economics like housing. Income elasticity, supply, | |
| demand, tax policy. And I associate myself with Mr. Tiberi and | |
| Mr. Lewis on this, because I think still trying to get people | |
| into home ownership is a desirable goal. | |
| My public life was in local government and trying to | |
| generate new units and trying to find a place where interest | |
| rates and price would get people into the market. We were able | |
| to come to one fast conclusion. Once people owned a home they | |
| really helped to transform the neighborhood. They made pretty | |
| good decisions every day. If you are working and you own a | |
| home, it is part of building a community. | |
| I think one of the dangers of the tax reform discussion we | |
| are having, and it is a long way off I think to conclusion, but | |
| certainly a compliment to the Chairman as well on | |
| conversational tone of these get-togethers we have had, because | |
| they really have been learning experiences. But I think we need | |
| to be mindful of what broadening the base could mean. | |
| Broadening the base really could mean that middle-income | |
| people are going to be paying more in an effort to cut that | |
| rate from 35 to, as the President has suggested, 28 and Members | |
| on the other side have suggested 25. But the homeowner | |
| deduction really does serve a very necessary purpose and that | |
| purpose is getting people who can do it--I think one of the | |
| outcomes of the financial crisis that we witnessed was--albeit | |
| a slow discovery, but renting is a good idea for some. But, | |
| nonetheless, still in an old city in New England home ownership | |
| is essential. | |
| I thought that some of the testimony, particularly from Ms. | |
| Gravelle, you suggested that identifying tax provisions that | |
| would allow significant reductions in the top rates while | |
| maintaining the current distribution of tax burdens, what do | |
| you mean by that exactly? | |
| Ms. GRAVELLE. Well, again, in our report we identified a | |
| handful of provisions that are significant at the top. That is | |
| capital gains, capital gains at death, dividends, pensions, and | |
| then the two itemized deductions really important for those | |
| folks, charitable contributions and State and local income tax | |
| deductions. But 70 percent of those provisions are related to | |
| savings incentives. | |
| So if you are reluctant to go after those savings | |
| incentives, and there are reasons you might want to be, that | |
| makes it very hard. If we eliminate all itemized deductions as | |
| we said, we have about 5 percentage points. So that is a long | |
| way from the distance that people were talking about for the | |
| top rate. | |
| Mr. NEAL. Well, I have an interest in savings here, how to | |
| generate greater savings, and as you have described it, maybe | |
| you could comment on this. I suspect the answer might be in | |
| some measure a bit illusive. But there are some who put the | |
| devil's advocate hat on that say that after you do home | |
| improvements and after you keep adding on an additional room or | |
| you keep exploring new ways to improve the property that in | |
| some measure it might not look quite as good or as appealing as | |
| it originally did as you relate it to the whole notion of | |
| savings. Could you speak to that? | |
| Ms. GRAVELLE. I'm sorry; could you clarify? | |
| Mr. NEAL. Well, there are those who argue from time to time | |
| that after one gets done improving a home over the course of a | |
| 30-year mortgage and all the things you do, because as you | |
| improve the home property taxes go up and even the value of the | |
| home might not go up, given what has happened in the last 5 | |
| years which remains fairly stable, there are those who say it | |
| is not quite as good a deal as it ordinarily would be. But is | |
| that a vagary of the marketplace or just a---- | |
| Ms. GRAVELLE. Well, I think that is the marketplace. I | |
| mean, if you look at housing before the housing bubble burst, | |
| housing looked like a very, very good investment. At least my | |
| house was a good investment. It fell down a little bit. It is | |
| going to come back up. I mean, this is a blip in the market. | |
| So I think homes are not a bad investment. The only way in | |
| which they are kind of questionable is if you put too much of | |
| your money in a home you don't diversify your portfolio very | |
| much. But then that is savings that you wouldn't have had | |
| anyway and people do tend to be a little myopic about savings | |
| sometimes. They don't really think about the future as much as | |
| perhaps we economists say they should. If it is just extra | |
| saving, then that is all to the good for your ability in | |
| retirement to have a decent standard of living. | |
| Mr. NEAL. Mr. Calabria is pining to get an opportunity | |
| here. | |
| Mr. CALABRIA. I just wanted to make two quick points. | |
| Professor Schiller at Yale has estimated--put together a price | |
| series for the last 100 years and has found that the after-tax | |
| return of housing over the last 100 years has averaged 1 | |
| percent annually. So I do think the last---- | |
| Chairman CAMP. We are going to have to leave it right | |
| there. We will go to Mr. Buchanan. | |
| Mr. BUCHANAN. Thank you, Mr. Chairman. And I want to thank | |
| each of our witnesses for being here today. I am a Member from | |
| Florida and this recession has been brutal on homebuilders and | |
| jobs. Florida is growing at a thousand people a day, you know, | |
| over the last couple of decades or so. We are in a tendency now | |
| where we are starting to come back. A lot of our builders have | |
| been basically put out of business, but they are starting to | |
| come back, as well. | |
| But I will tell you this, what I have seen lately and | |
| really over the last 30 years, the interest deduction does make | |
| a difference. I see a lot of homes that are being built in our | |
| area, the ones that can afford to buy a second home or buy a | |
| home, a lot of them, 70 percent, are paying cash. But the other | |
| part of it in terms of southwest Florida, there are a lot of | |
| people who are buying homes for $200, $250, $280 thousand. That | |
| is where the marketplace is. I think of two or three of our | |
| largest homebuilders that have survived this and that is where | |
| their focus is. | |
| A lot of those are young families, first and second home | |
| buyers. A lot of them have student loans or they are people | |
| that are working, technicians in our area. They are making | |
| $50,000 a year. They are being squeezed in terms of higher | |
| health costs and everything else in their area. But the | |
| interest deduction to a lot of them is a difference of $200 or | |
| $300 when they look at the overall payment that they are going | |
| to get back or to have that break in terms of going forward. | |
| So I would just ask, Mr. Fleming, when you look at this, | |
| this hasn't just been a recession in Florida. I hate using this | |
| word, but it has been a depression. We are starting to get some | |
| momentum coming back, especially in terms of homes $250,000 and | |
| under. What impact will this have, do you think, on eliminating | |
| that deduction? I just see this having a huge impact on a lot | |
| of people in our area. | |
| Mr. FLEMING. Yes, it is true. You unfortunately are from | |
| one of the poster childs of everything that went wrong in the | |
| housing market over the last 5 years. And there is recovery | |
| there. In large part, actually, the housing recovery that you | |
| are seeing is being driven by what are typically abnormal | |
| forces in the housing market. Institutional investor activity, | |
| lots of cash buyers. These are not the normal things that drive | |
| prices up. It is typically growing incomes and first-time home | |
| buyers entering the market and things like that. | |
| It is hard to say, I guess. I was laughing with a colleague | |
| of mine this morning saying the only thing I can be absolutely | |
| sure about with the mortgage interest deduction is that given | |
| that it creates both the incentive to consume more homes and | |
| some level of increased home ownership in and of itself. But | |
| all of that urban sprawl and traffic that I had to drive | |
| through to get here this morning can be attributed in part to | |
| mortgage interest deduction. Of that I am sure. | |
| But in other terms I think we have to be very careful. The | |
| price responds to something like a change, any sudden change. | |
| My testimony kind of gets to the point that suppliers, sellers, | |
| and buyers immediately respond to temporary change or immediate | |
| shock. Right? And we saw it in the first-time home buyer tax | |
| credit, we saw it with the capital gains tax. | |
| So the idea of an immediate shock happening, yes. The | |
| magnitude, harder to tell. Most of the models that we look at, | |
| the econometric models that come up with estimates of the price | |
| changes, basically hold the supply side inelastically fixed. In | |
| other words, there is no supply response to the impact. So of | |
| course the price response is bigger. In the immediate term that | |
| is true. It takes on average 9 months to build a home. Right? | |
| But in the longer run, of course there is going to be some sort | |
| of supply response to it. | |
| So it really gets down to, yes, maybe there is an immediate | |
| shock but the overall longer-run benefit is not necessarily as | |
| strong as the estimates that are empirically derived show. | |
| Mr. BUCHANAN. Any of the other panelists, I would like to | |
| get your thoughts. | |
| Mr. CALABRIA. I will make a couple of quick--clearly in my | |
| proposal I want to hold those families harmless after tax. I | |
| want to emphasize that. Second, $180,000 and below, if that is | |
| your only deduction is the mortgage interest deduction, you are | |
| better off itemizing. And we see that. And, third, as I | |
| mentioned in my testimony, the value of the mortgage interest | |
| deduction fluctuates with interest rates and, interestingly | |
| enough, if you did a time series when you value the mortgage | |
| interest deduction at its highest it is actually when | |
| construction is at its lowest. So they are inversely related. I | |
| have seen very little, if any, evidence to suggest to me that | |
| we see extra construction because of the mortgage interest | |
| deduction. Ultimately construction is driven by population and | |
| household formation. | |
| Mr. BUCHANAN. The point I was trying to make, in the real | |
| world just looking on the ground there, there are a lot of | |
| families, whether they are 30, 35, two workers in the family, | |
| that deduction of $200 or $300 makes a difference per month | |
| because that is what they are going to see. And the second | |
| point is we are historically low in terms of our interest rates | |
| at 3 or 4 percent. If you go back over 30 years, I remember you | |
| could not get a mortgage rate under 10 percent, but normally 7 | |
| or 8 percent. Again, that would even be a bigger issue for them | |
| going forward. | |
| Chairman CAMP. Mr. Pascrell is recognized. | |
| Mr. PASCRELL. Thank you, Mr. Chairman. As was mentioned | |
| previously by Chairman Johnson, we worked over the last several | |
| weeks having I think seven really concrete meetings with | |
| different groups and looking at the possibility, not only in | |
| residential but commercial real estate. And our objective, Mr. | |
| Chairman, was to see whether some sheltering of income, some | |
| incentives, or any of them, made sense in terms of economic | |
| strength and fairness. I think that was significant in every | |
| group that we talked with, and it was certainly an elevated | |
| discussion all the time and it was civil and thanks to Mr. | |
| Johnson I think we did a lot of work in a very short period of | |
| time. | |
| The Tax Code has many provisions that impact residential | |
| real estate. And some of them, including mortgage interest | |
| deduction and deduction for State and local property taxes, are | |
| among the largest expenditures. | |
| It is not a surprise that they would be looked at in a | |
| quest to eliminate expenditures to lower the rates. But I think | |
| we need to proceed with caution. And you heard that this | |
| morning from our great panelists here. | |
| These expenditures are large not by accident. They are | |
| large because they are well understood and utilized by the | |
| middle class. We can't simply do tax reform and we can't do tax | |
| reform simply for tax reform's sake. We want to come out of | |
| this. I mean, most of the pages that are written in the Code | |
| were not written by you, Mr. Chairman, or me. They were not | |
| written by average middle-class folks. Huge groups that could | |
| afford a lot of lawyers, wanted to hide certain parts of their | |
| income. They are not criminals to do that. But we are looking | |
| at what is fair and what is not fair. And I think both sides | |
| would agree to that simple statement. | |
| Ms. Gravelle, I have a question. In your testimony you made | |
| a point that the tax preferences for owner-occupied houses like | |
| the mortgage interest deduction and the deduction for State and | |
| local taxes, are not the tax preferences most significant to | |
| the top tax brackets. I think that is what you said. Am I | |
| correct? | |
| Ms. GRAVELLE. Yes. Yes, that is right. | |
| Mr. PASCRELL. I strongly believe that we need to do | |
| something about income inequality in this country. Now, | |
| according to a recent study by Samuel Saez of the University of | |
| California Berkeley, the top 1 percent of households captured | |
| 121 percent of income gains between 2009 and back to 2001. The | |
| 99 percent actually grew poorer. Between 1993 and 2011 the top | |
| 1 percent income grew by 57.5 percent while income for the rest | |
| grew 5.8 percent. | |
| What is the percentage of taxpayers with incomes over $1 | |
| million who take the mortgage interest deduction? Do you know | |
| that? | |
| Ms. GRAVELLE. I think it is a large percentage. But it is a | |
| small percentage of their income. High-income people have | |
| houses and sometimes they have mortgages, but I imagine Eric is | |
| pointing his finger here; he knows this answer better than I | |
| do. | |
| Mr. PASCRELL. Go ahead. | |
| Mr. TODER. I think about a third of the people with income | |
| over $1 million take the mortgage interest deduction. And many | |
| of them have already either paid down their mortgages or, | |
| actually, I should say benefited from it, because we assume | |
| that if you eliminated the mortgage interest deduction many of | |
| those people would just simply pay off their mortgages. | |
| Mr. PASCRELL. Does that hold also for State and local | |
| taxes? | |
| Mr. TODER. Almost all of them would be taking State and | |
| local tax deductions. | |
| Mr. PASCRELL. So pretty much the same; right? | |
| Mr. TODER. Right. | |
| Mr. PASCRELL. According to the Joint Committee on Taxation, | |
| 75 percent--75 percent of the MID is claimed by taxpayers with | |
| incomes below $200,000. That is what Mr. Tiberi and Mr. Levin | |
| pointed out before. It is about the same for State and local | |
| taxes. And I agree and associate myself with the words of Mr. | |
| Levin and Mr. Tiberi. If we eliminate the deductions for | |
| mortgage interest and State and local taxes, how much would tax | |
| rates have to come down in order to ensure the middle class is | |
| going to be paying an overall lower effective rate? | |
| Chairman CAMP. If you could answer briefly because time has | |
| expired. | |
| Ms. GRAVELLE. Just from memory, I think it is somewhere-- | |
| that class of those deductions are about 10 percent of income. | |
| So you are talking about a 10 percent rate reduction. | |
| Chairman CAMP. Thank you. | |
| Ms. Jenkins is recognized. | |
| Ms. JENKINS. Thank you for being here. Thank you, Mr. | |
| Chairman. | |
| Mr. Toder, your testimony comes to the conclusion that the | |
| mortgage interest deduction does a poor job at promoting home | |
| ownership. It mentions studies that have compared home | |
| ownership rates in countries like Canada, the United Kingdom | |
| and Australia. Can you just elaborate for us on how the U.S. | |
| compares in terms of overall home ownership rates to those | |
| similar countries and what sort of policies those other | |
| countries employ to promote home ownership? | |
| Mr. TODER. I am not sure what all the policies are in terms | |
| of their financial market policies, but Canada, Australia and | |
| New Zealand have all eliminated the mortgage interest | |
| deduction, which they previously used to allow. The United | |
| Kingdom has been phasing it out over a long period of time. | |
| They were actually doing it through the banks, so you would get | |
| it at the basic rate. The people above the basic rate wouldn't | |
| benefit from it. But they gave the subsidy to the lender and | |
| that had the same effect, really had | |
| the same effect as the proposals I am talking about, of | |
| converting the deduction to a credit, which would give the same | |
| percentage subsidy to everybody. So that was the way they did | |
| it. But in all of those places the home ownership rate is at | |
| least as high as it is in the U.S. | |
| Ms. JENKINS. Okay. Speaking of that, you noted that recent | |
| major tax reform proposals, including Simpson-Bowles and the | |
| President's 2005 Tax Reform Advisory Panel and the Bipartisan | |
| Policy Center, have all recommended moving from an interest | |
| deduction to tax credits. | |
| The general consensus appears to be between 12 to 15 | |
| percent credit and either refundable or nonrefundable. I | |
| believe that you worked with the Bipartisan Policy Center on | |
| developing their tax reform proposals. So could you just | |
| describe for us how the determination was made to arrive at | |
| that credit level, whether to make it refundable, and what sort | |
| of deliberations took place? | |
| Mr. TODER. Sure, I would be happy to. I was a consultant to | |
| them. I was not a decisionmaker but I was helping them with the | |
| analysis. | |
| Ms. JENKINS. Okay. | |
| Mr. TODER. They were trying to get a much broader tax | |
| reform as part of an overall package to reduce the deficit, so | |
| their tax reform was actually raising revenue a bit. They | |
| started out with the idea that they wanted to get rid of as | |
| many tax expenditures as possible but came to the conclusion | |
| that some of them had to be retained in some form, one of which | |
| was mortgage interest, another one was charitable. | |
| They also developed the very far-reaching idea that they | |
| would like to get many people out of having to file tax | |
| returns. So the way they went about that was they restructured | |
| all of the basic benefits. They eliminated the standard | |
| deduction, personal exemptions, and the earned income credit. | |
| They replaced them with a flat child credit and a flat earning | |
| subsidy. | |
| So they set it up so that if you were in the lowest tax | |
| bracket, and you didn't have a lot of capital gains, you didn't | |
| have to file a return. It would all come out through | |
| withholding. And so this kind of mortgage interest subsidy fit | |
| into that. It was a subsidy at the basic rate of 15 percent, | |
| which was the bottom rate in their proposal. | |
| Ms. JENKINS. Yes, Mr. Swagel. | |
| Mr. SWAGEL. I would just like to add to what Eric said, the | |
| comparison between a credit and a deduction is an important | |
| one. The deduction is valuable to people at the bottom, but it | |
| is really valuable to people at the top. Whereas the credit, of | |
| course, is the same amount for everyone, depending on whether | |
| it is refundable or not. | |
| So in the sense of moving from deduction to credit it | |
| probably better focuses the taxpayer resources on lower | |
| incomes. Because for the person starting out, Ms. Jenkins, a | |
| person buying a $250,000 house, they will get the same credit | |
| as someone using the full $1.1 million of deduction, whereas in | |
| the current system they don't. | |
| Ms. JENKINS. Thank you. | |
| Mr. JOHNSON [presiding]. Mr. Davis, you are recognized. | |
| Mr. DAVIS. Thank you, Mr. Chairman. I want to thank all the | |
| witnesses for coming. Ms. Gravelle, the National Housing Trust | |
| Fund was authorized in the Housing Economic Recovery Act | |
| of 2008 specifically to address the housing needs of extremely- | |
| low-income households. The NHTF is a block grant to States | |
| that, once funded, can be used to produce, preserve, | |
| rehabilitate and operate rental homes for very-low-income | |
| households. At least 90 percent of the funds must be used for | |
| rental housing and at least 75 percent must benefit extremely- | |
| low-income households. | |
| The NHTF is intended to be a permanent program with | |
| dedicated sources of funding, not subject to the annual | |
| appropriations process. The funds are to be distributed by a | |
| formula based on factors detailed in the statute with a $5 | |
| billion investment. Michigan would receive $146.1 million. The | |
| NHTF was initially to be funded by contributions from the | |
| government-sponsored enterprises Fannie Mae and Freddie Mac; | |
| however, shortly after HERA was enacted the financial crisis | |
| hit and of course these agencies were taken over by a | |
| conservatorship and funding was suspended. And, of course, | |
| Congress has never actually put the money in in the first | |
| place. | |
| The National Low Income Housing Coalition has talked a | |
| great deal about assistance to renters, that these individuals | |
| need some kind of help and could benefit greatly from it. And | |
| there have even been some who have talked about a renter's tax | |
| credit. How do you respond to those kind of thoughts? | |
| Ms. GRAVELLE. Well, you could have a renter's tax credit | |
| for low-income people if you make it refundable. But it | |
| wouldn't work otherwise, because very low-income people don't | |
| generally pay taxes because of the earned income credit and | |
| other provisions. I mean, for getting money to low-income | |
| housing there are a lot of different routes. The low-income | |
| housing credit in the Tax Code is one method, but it has to | |
| pass through a lot of middle men on the way so a lot of folks | |
| think that grants would be better. | |
| The other thing you could do is give people vouchers for | |
| rental housing directly from the government. Or, as I said, you | |
| could do it through refundable tax credit. The problem is | |
| people who don't file taxes then would have to file. A lot of | |
| people do, if they | |
| are working, because of the earned income credit. But there is | |
| always--for this particular objective there are a lot of | |
| different ways to get there. | |
| And I would say--maybe Eric can tell me what he thinks--the | |
| consensus is that usually these things are better done through | |
| spending rather than routing them through the tax system. | |
| Mr. DAVIS. Are there any other thoughts or ways that we | |
| might want to look at or could look at to try to make sure that | |
| these individuals or this category of citizens actually get | |
| some benefit that might move them a little bit beyond where | |
| they are relative to decent housing? | |
| Ms. GRAVELLE. Low-income housing issues in general are not | |
| really something that I have studied a great deal. But I think | |
| there has been a concern about diversifying the neighborhoods | |
| so you don't have pockets of low-income people in the same | |
| place. Those are some of the issues I know that come up with | |
| public housing. | |
| But I think an economist might say the easiest way is to | |
| give people a voucher to help pay their rent. That might be the | |
| easiest and most straightforward way to do it. | |
| Mr. CALABRIA. I will just quickly mention, because I | |
| mentioned in my testimony, the real difference between owners | |
| and renters is that we don't tax imputed rent for owners. And I | |
| suggested in my testimony that we stop taxing rent and we could | |
| limit that to rents charged below a certain level that are | |
| affordable. And if the market is competitive in certain places | |
| that will get passed on to the renter. | |
| Mr. DAVIS. Thank you both very much. Thank you, Mr. | |
| Chairman. And I yield back. | |
| Mr. JOHNSON. Thank you. Mr. Paulsen, you are recognized. | |
| Mr. PAULSEN. Thank you, Mr. Chairman. I have actually found | |
| this testimony very enlightening. It is part of that whole | |
| process of really diving in deep as to what the Tax Code is | |
| really about, because it is deep. If you do make changes in one | |
| area, it impacts quite a few different areas in other sections | |
| of the Code. | |
| Again, this is not about doing tax reform for tax reform's | |
| sake. This is about finding real solutions for a broken Tax | |
| Code. Everyone acknowledges the Tax Code is broken and we need | |
| a Tax Code that helps America compete and win, that grows the | |
| economy, that grows jobs. And we need a Tax Code that is a lot | |
| simpler and fairer so that an average family can actually do | |
| their own taxes. | |
| I find it astonishing that still nine out of ten American | |
| families are either required to pay someone else to do their | |
| taxes or purchase some sort of commercial software in order to | |
| do those taxes. And that is just not a Tax Code that is | |
| designed for the average person obviously in terms of | |
| simplicity. That is a Tax Code that is designed for accountants | |
| and lawyers and others. | |
| There is a lot of inefficiency and it really is time for | |
| us--and we are doing the right thing in terms of having 20-plus | |
| hearings, laying the groundwork, moving forward with these | |
| working groups, to making sure it is not going to be a | |
| continuing process of just special interests and handouts and | |
| bailouts, but really getting into the details. | |
| But I want to dive a little bit more into the low-income | |
| tax credit. This is an area where I have spent some time with | |
| some folks in Minnesota. I have seen the homes that the low- | |
| income tax credit has actually produced through rehabilitation | |
| and loans to individuals. I do hear from the providers all the | |
| time that this is a credit that is a very effective way of | |
| producing affordable housing and providing homes for those who | |
| need them. | |
| So knowing that is the case--and part of the problem in the | |
| past has been I wonder is this tax provision going to be | |
| extended, is it going to be extended once again? So there is no | |
| certainty, there is no predictability for building the housing. | |
| So that is one of the goals of tax reform, to make sure that we | |
| have predictability and certainty. | |
| But just to follow up, what would happen if that tax credit | |
| just went away? Would making that tax credit permanent improve | |
| results or whatever takes its place improve results? And is | |
| there a way we can actually improve that credit for better | |
| results? It has been a public-private partnership. Mr. Swagel, | |
| you talked a little bit about that in your testimony. I know | |
| this is a long section of the Tax Code. But can you just maybe | |
| elaborate a little bit more? | |
| Mr. SWAGEL. Sure. I think the permanence would be really | |
| important. It could get at this uncertainty. The other thing | |
| that would help is that the value of the tax credit varies with | |
| the economic cycle and the demand for it. And so there is a | |
| sense in which it is not clear that the Tax Code is the best | |
| way to do this. If we want more supply of affordable housing | |
| units, which I think as a Nation we do, it is probably better | |
| done as spending and not to run it through the Tax Code. | |
| The other thing that might be considered, and, again, it is | |
| not argument to say do less of it, it is really do it better. | |
| But I think my testimony questions its effectiveness. And | |
| really it is that, is it effective and what is the best way to | |
| make it effective? Because we want to do both supply and | |
| demand, not supply or demand. The vouchers will help on the | |
| demand side and I think the affordable housing tax credit, if | |
| there were a better way of doing it, could help on the supply | |
| side. | |
| Mr. PAULSEN. Mr. Calabria. | |
| Mr. CALABRIA. Honestly, I have been a little skeptical and | |
| certainly looked at the low-income tax credit over time. I | |
| certainly understand why users of a program think it is a great | |
| program. But to me the academic evidence suggests: (a) There is | |
| a tremendous amount of crowd-out and about half of the units | |
| would have gotten built otherwise; and (b) There is evidence to | |
| suggest that most of the subsidy ends up with developers, | |
| syndicators, and lawyers. And I have nothing against | |
| developers, syndicators, and lawyers, all good people, but they | |
| are not necessarily who I think we should prioritize | |
| subsidizing. | |
| And so I am skeptical of it as a delivery vehicle. My | |
| tendency--I really--I know that public-private always sounds | |
| like a good thing, but I remember for years telling what a | |
| great public-private partnership Fannie Mae was for the | |
| government and that didn't turn out so well. | |
| So I do think we need to rethink some of what that means. I | |
| think Phil alluded to this earlier. I think that we should | |
| directly subsidize the people that we want to directly | |
| subsidize. If we care about low-income households, let's | |
| subsidize low-income households. I am very skeptical of doing | |
| roundabout ways through intermediaries. If the problem is | |
| somebody is poor, let's make them not poor. That seems like a | |
| pretty straightforward way of doing it to me. | |
| Mr. SWAGEL. One other thought to add, what you heard from | |
| the constituents in Minnesota is on the upkeep. And that really | |
| is the case. That the tax credit subsidized units do have | |
| better upkeep and that eventually those units go back to a | |
| fully private model. And I think that is the challenge. How do | |
| we get that? How do we make sure that low-income subsidies are | |
| not just Section 8, not just for low-income people, but have | |
| the diversity and that incentive for better upkeep? | |
| Mr. CALABRIA. The geographic evidence suggests to me that | |
| tax credit properties do get built in areas that are already | |
| high concentrations of race and poverty. So I tend to be more | |
| preferential to vouchers because I think we want to be able to | |
| get people into good communities rather than continuing to | |
| build properties in neighborhoods that already have problems | |
| and high concentrations of poverty to begin with. | |
| Chairman CAMP [presiding]. Time has expired. Ms. Sanchez is | |
| recognized. | |
| Ms. SANCHEZ. Thank you, Mr. Chairman. And I want to thank | |
| all of our panelists for sharing their thoughts with us today. | |
| I represent a pretty working class district in southern | |
| California and my constituents work very hard, often long hours | |
| and multiple jobs in order to just save up the money to | |
| purchase their first home. So for me it is incredibly important | |
| to make sure that we don't make it more difficult for working | |
| people to achieve the American dream of owning their own home. | |
| And that is why I am a little bit skeptical of changes to the | |
| Tax Code that would have the effect of putting that goal for | |
| them out of reach. | |
| Just last month we did a housing event in one of the cities | |
| in my district, Pico Rivera, that was aimed at doing two | |
| things: Helping current homeowners keep their homes and | |
| educating potential first-time home buyers about the process of | |
| purchasing a home. And at that event for the first time in a | |
| long time we started to hear many positive signs about the | |
| local housing market improving and gaining strength. | |
| And that was in marked contrast to the past several years | |
| when housing or the fear people had about losing their housing | |
| was overwhelmingly the number one issue that constituents were | |
| calling into my office and asking for help on. | |
| So targeted provisions in our Tax Code, things like | |
| excluding the discharge of principal residence indebtedness | |
| from income, have helped turn that tide and have gotten the | |
| housing market back on the right track. With the turning of | |
| that tide I think come good paying jobs in both the | |
| construction and the housing industries, good paying jobs that | |
| help a new group of people in turn achieve their dream of home | |
| ownership. | |
| Some of the overarching themes in the tax reform | |
| discussions that we have had are a little bit concerning to me. | |
| My biggest concern is that we not pay for tax reform on the | |
| backs of working people. Broadening the base and lowering the | |
| rate sounds great, it is a great bumper sticker, it is a great | |
| slogan, but that can't come at the cost of working class | |
| families. | |
| We have heard from some of the panelists today that | |
| targeted housing provisions in our Code create economic and | |
| market distortion, but many tax expenditures are essential to | |
| maintaining parts of our market and economy that help create | |
| good paying jobs. Many provisions discussed today help serve | |
| that very purpose. | |
| So my first question, Ms. Gravelle, could you elaborate a | |
| little bit further on just how hard it will be to achieve the | |
| Majority's tax reform principle, this broadening the base and | |
| lowering the rate, especially with respect to those tax | |
| incentives that are net positive with respect to job creation? | |
| Ms. GRAVELLE. In our study, we took the top 20 tax | |
| expenditures, which account for 90 percent of the revenue, and | |
| we went through them one by one and said, okay, what are these, | |
| what are the merits of these, what are the objectives. And, | |
| again, a large fraction of those provisions relate to savings. | |
| Or just take something like capital gains. Even if you wanted | |
| to tax capital gains at ordinary rates, the scoring methodology | |
| would not give you revenue from capital gains. | |
| Some of them are very difficult technically. For example, | |
| even though a lot of people talk about taxing employee health | |
| benefits, it is actually very difficult to impute the value of | |
| that to people in many different circumstances. And that came | |
| up during health reform. That is very hard to do, and that is | |
| why they ended up with a very limited, sort of the Cadillac of | |
| tax provisions. | |
| Defined benefit pension plans. How do you impute income? Do | |
| we really want to tax Medicare recipients on the value of their | |
| Medicare benefits? What do we want to do? Do we want to leave | |
| the earned income credit in place? Do we want to disallow the | |
| taxation for catastrophic medical expenses? | |
| We went through each of those one by one, and when we | |
| finished examining them, we just concluded that, for a whole | |
| variety of reasons, the objectives, the technicalities, the | |
| merits in general, that it was just very hard to have a large | |
| base broadening. If you eliminated every tax expenditure, we | |
| found that you could get the top rate down to about 23 percent, | |
| but once you start cutting those out, it gets harder and harder | |
| to do that. And that CRS report is out there, you know, it is | |
| available for people to look at. It shows how careful we were | |
| going through each provision one by one. | |
| Ms. SANCHEZ. And each of those provisions you just | |
| discussed, I am assuming probably affect middle-income and low- | |
| income people more than any other group. | |
| Ms. GRAVELLE. We look at some that affect middle-income and | |
| some high-income, but many of these provisions, like employee | |
| health insurance, really are a middle-income---- | |
| Chairman CAMP. All right. Time has expired. | |
| Mr. Kelly is recognized. | |
| All right. Mr. Griffin is recognized. | |
| Mr. GRIFFIN. Thank you, Mr. Chairman. Thank you all for | |
| being here today. I appreciate it. This has been a very helpful | |
| hearing. | |
| And I want to echo some of the comments I have heard from | |
| some of my colleagues, in that we are taking a comprehensive | |
| look at the Tax Code because most folks agree that it is a mess | |
| and it is counterproductive. And if we are going to encourage | |
| economic growth and job creation, the Tax Code right now, in my | |
| view, is a barrier to that. That is why we are doing this. We | |
| are not doing it for the sake of it because we don't have | |
| anything else to do. We are doing it because it is helpful to | |
| this country to fix this Tax Code. | |
| You know, on the way back from Afghanistan about a year and | |
| a half ago, while the pilots were resting, we stopped in | |
| Estonia, and we met with the former Prime Minister, who is now | |
| the Defense Minister, and he was telling us about his tax | |
| system. They said they pay in Estonia, they pay their income | |
| tax online in about 15 minutes. The average Estonian takes 15 | |
| minutes to pay their tax. Now, I am not promoting their | |
| particular way of taxation, but the point is that we can do | |
| much, much better. Whatever that looks like, we can do much, | |
| much better. And, you know, we certainly can do as well as the | |
| beautiful country of Estonia. | |
| And I would say that the best thing for working families, | |
| working families in Arkansas that I represent, or wherever, the | |
| best thing for them is a growing economy and remaining | |
| competitive internationally. So that is why we are doing this. | |
| To address the mortgage interest deduction, I would like to | |
| say that I think it has been well said by many others here | |
| today that you can talk about, you know, the high-income folks | |
| that take advantage of it or whatever, but at its core, this | |
| benefits middle-class, working Americans. A lot of people count | |
| on this provision, and I think the statistics show this, | |
| whether you are looking at the percentage that are under | |
| $200,000 in income or $100,000. | |
| But one thing that I wanted to explore a little bit, Mr. | |
| Calabria, if you could talk a little bit about your comment | |
| earlier where you said, I think it was you, you said that the | |
| mortgage interest deduction incents more higher debt, not | |
| equity, not ownership. And if you could talk a little bit about | |
| that and your proposal to address that. | |
| Mr. CALABRIA. Sure. Let me start off by saying, you know, | |
| my proposal, I want to try to keep those families held harmless | |
| after taxes, not see their tax increase, but what we were doing | |
| is allowing them to prioritize, because, you know, I think | |
| housing is important, but I think education is important, I | |
| think healthcare, I think food is important, but I don't think | |
| the direction to go is here in Washington where we decide what | |
| people should consume or where they put their marginal dollar. | |
| I think they are smart enough to figure that out for | |
| themselves, quite frankly. | |
| So the thing is to reduce these tax connections to various | |
| consumption items and let people make those decisions for | |
| themselves while keeping their taxes low. My point being, I | |
| think we can tie that in that way, leaving these families the | |
| same after tax, you know, in very much the same way. | |
| Mr. GRIFFIN. You would acknowledge, would you not, that | |
| some of the proposals for a credit instead of a deduction, if | |
| you left the tax rate the same, would really hit a lot of the | |
| folks that take advantage of the deduction, if you left the | |
| marginal rates the same. | |
| Mr. CALABRIA. It would. And so I do think---- | |
| Mr. GRIFFIN. Because it would be far less than the | |
| deduction. | |
| Mr. CALABRIA. So one of the objectives should be to try to | |
| lower marginal rates, because ultimately at the end of the day | |
| what we should be trying to achieve is growing household income | |
| and reducing the taxation of income, because income is what | |
| makes everything else in the world possible. So, you know, you | |
| could have all the mortgage interest deduction you want in the | |
| world, if the family doesn't have the income to afford the | |
| house to begin with, it doesn't matter. | |
| So, again, growing income should be our primary objective | |
| here, in my opinion. And I think a flat low rate like they have | |
| in Estonia should actually be something that we try to achieve | |
| and we should try to reduce some of the complexity in the tax | |
| system while reducing the penalty to work. | |
| Mr. GRIFFIN. Is it fair to say that a lot of the reforms | |
| that you propose would depend upon that lower tax rate, it | |
| would not be to the Code as it currently is constituted? | |
| Chairman CAMP. And if you could answer briefly. | |
| Mr. CALABRIA. Yes or no, I think it is important to reduce | |
| leverage even if we don't reduce overall tax rates, but I do | |
| think reducing tax rates should be part of that. | |
| Chairman CAMP. All right. | |
| Mr. GRIFFIN. Thank you, Mr. Chairman. | |
| Chairman CAMP. Mr. Renacci is recognized. | |
| Mr. RENACCI. Thank you, Mr. Chairman. And I want to thank | |
| all the panel for being here today also. | |
| You know, it is interesting. Of course, a lot of the | |
| questions have already been answered, but in my past life, | |
| before I got here, I was a CPA, and I remember sitting down | |
| with many people who walked in, some people just with a W-2, | |
| who said, help me do my tax return. So, again, I am going to | |
| repeat, as many of my colleagues have said, we need to make | |
| sure we have a simpler tax return so people can just file their | |
| tax return and not be concerned when they just have that W-2. | |
| But it is interesting, when it comes to home ownership, I | |
| had many that would come in and say, I am buying a home, but | |
| they never really asked what the interest deduction would do | |
| for them, either. And the question I always asked them was, | |
| well, you know, you are going to buy a home, have you looked at | |
| whether the economic value of buying that home is worth it, if | |
| the interest deduction is even going to help you? Are you | |
| better off to rent? In today's day and age housing is not, you | |
| know, the old, I am going to buy a home and I will pay my | |
| mortgage down and housing prices are going to go up, I am going | |
| to have a nest egg at the end. I am not sure we are there | |
| today, when housing prices are not moving up as fast as they | |
| used to and at the same time the debt you are paying in some | |
| cases, because we already have the standard deduction of | |
| $6,500, is not even a deduction for you. So it is interesting | |
| how complicated the Tax Code can be. But what is more | |
| interesting is that many people, as I said, really don't even | |
| care about the interest. | |
| My dad bought his first house, God love him, 30-plus years | |
| ago for $11,000 and probably never cared one bit about the | |
| interest deduction, and sold it 30 years later for $6,000. So | |
| it wasn't an economic advantage to him to have that house. But | |
| my friend's daughter is acquiring a house. She just got out of | |
| college. And she is not looking at--you know, I said to him, | |
| ``Has she looked at the interest deduction?'' And my friend | |
| said, ``No, she doesn't care, she just wants to own a home.'' | |
| So it gets back to something you said, Mr. Calabria, which | |
| is interesting to me. You said that, and you didn't finish, but | |
| the average after-tax return is less than 1 percent on home | |
| ownership. Could you explain that, go into more detail? | |
| Mr. CALABRIA. Sure. Bob Shiller, a finance professor at | |
| Yale, has put together a price series from 1890 to today, you | |
| know, when you put inflation in there, and so his calculation | |
| is after inflation on an annual basis, housing returns about 1 | |
| percent for the value of the house. Now, of course, the retort | |
| is that, well, it can be massively leveraged and therefore your | |
| return is on that leverage. But as we have learned repeatedly, | |
| this was not the first financial crisis we had, and sadly, I | |
| don't think it is going to be our last, that this massive | |
| leverage in the system repeatedly comes back and | |
| haunts you. Leverage maximizes gains, but it also maximizes loss | |
| es. | |
| So my point here throughout the testimony is not--I think | |
| home ownership is a great thing, I think it is a good thing. I | |
| think households being massively leveraged is not a good thing | |
| and I don't think we need--I think we can achieve high home | |
| ownership without massive leverage on the part of households. | |
| Mr. RENACCI. Mr. Fleming. | |
| Ms. GRAVELLE. Could I just make a comment about---- | |
| Mr. FLEMING. I will just say quickly, the idea of--and I | |
| think this is something that many forgot during the most recent | |
| crisis was you gain utility of shelter primarily from housing, | |
| not as a financial---- | |
| Ms. GRAVELLE. Absolutely. That is what I was going to say. | |
| That is the return. | |
| Mr. FLEMING [continuing]. Not as a financial investment. | |
| And to your point, many people make the decision about their | |
| tenure choice of how to achieve that shelter not by looking at | |
| the financial model of user costs. I mean, if you ask them, | |
| well, what did you use, did you look at the user costs of | |
| renting versus buying, they give you a blank stare, right? So | |
| it is about your position with, are you getting married, are | |
| you having children, you know, all these household and | |
| demographic types of things that drive that decision, and in | |
| some cases on the margin, maybe the financial decision, maybe | |
| the financial decision of, oh, I can get that mortgage interest | |
| deduction and that helps me make on the margin that choice of | |
| becoming a first-time home buyer. | |
| But honestly, first-time home buyers, their bigger | |
| constraint is the downpayment; not making the payment when they | |
| are in there, but getting access to a downpayment. | |
| Mr. RENACCI. If there was an opportunity to build savings | |
| before you went into home ownership, and then use that savings | |
| to buy that home, that is something that we probably should | |
| look at, too. | |
| Mr. FLEMING. Right. That is the challenge. And you see the | |
| first-time home buyer tax credit most recently clearly drew in | |
| a lot of demand. People were able to overcome that building of | |
| downpayment problem to get at buying a home. | |
| Mr. RENACCI. Mr. Calabria, there was one other comment you | |
| made that I just want to understand. You said something about | |
| the renter, no tax for the--I am trying to figure that out. | |
| Mr. CALABRIA. Yeah. I know imputed rent is not necessarily | |
| a straightforward concept. So if you think about it, you know, | |
| you rent a unit, you are paying rent, the landlord is paying | |
| tax on that rent. And so the economists tend to think, well, if | |
| you bought a unit, you are renting it from yourself, but you | |
| are not paying tax, and so that makes the choice between you | |
| becoming a renter less attractive if you were an owner. Because | |
| remember, all the mortgage interest, all the property tax | |
| stuff, that is expensible for the landlord, too, so there is a | |
| quality there. And so the real impact, again, is, as I would | |
| suggest, if we stop taxing rent, we will level the playing | |
| field between renters and homeowners. | |
| Mr. RENACCI. All right. | |
| Chairman CAMP. Thank you. | |
| Mr. RENACCI. Thank you. | |
| Chairman CAMP. We have two people who are going to come | |
| question and then I am going to the second panel. So we will go | |
| to Mr. Blumenauer and then to Mr. Reed, and then we will go to | |
| the second panel. | |
| Mr. BLUMENAUER. Thank you, Mr. Chairman. And I appreciate | |
| the way the two panels have been structured to, I think, walk | |
| us through the big picture. It is actually one of those rare | |
| times when the written testimony is actually better on both | |
| panels, and we really appreciate that. | |
| I would like to just take a slight, it is not a digression, | |
| but take one aspect of this. I have spent a lot of time working | |
| with a number of the organizations that will be testifying | |
| dealing with trying to have a functional flood insurance | |
| program that adds stability to the market. We have also spent a | |
| lot of time working on disaster relief, prevention, recovery, | |
| which, because of what has happened with climate instability, | |
| these costs are skyrocketing for the Federal Government. | |
| I am interested in any observations that you might have, | |
| and I would look for some from the other panelists later, to | |
| the extent to which we are using the tax system to subsidize | |
| people living in places where it has repeatedly been shown that | |
| nature may not want them. We have legislation that prohibits | |
| Federal investment dating back to the Reagan era, the Coastal | |
| Barriers Protection Act, where we don't put infrastructure | |
| there, yet we allow mortgage interest deductions for second | |
| homes in places that have been wiped out and we are spending | |
| money recovering. | |
| Do you have any thoughts about whether, regardless of what | |
| we do with mortgage interest reduction and tax reform, we might | |
| do a deeper dive to limit the exposure to the taxpayer paying | |
| twice, once to subsidize people living in a place that they | |
| probably shouldn't be, and then repeatedly going back in, | |
| cleaning up, paying disaster payments, and then allowing | |
| continued subsidization of that development? Any thoughts? | |
| Mr. CALABRIA. I will just mention, I will preface with, | |
| while staff on Senate Banking, I worked on all of our flood | |
| insurance issues and I actually headed our Katrina response for | |
| the Committee as well. And so I would certainly agree that we | |
| subsidize a number of policies that, in my opinion, do | |
| tremendous harm to the environment. For instance, I believe | |
| Fish and Wildlife Services have concluded that the flood | |
| insurance program has adversely impacted salmon runs. So there | |
| is a variety of negative impacts for subsidizing development in | |
| very sensitive areas, and I certainly think we should | |
| reconsider those subsidies. | |
| And, of course, it is also important to keep in mind, you | |
| know, while climate has changed, to me it looks like the | |
| evidence suggests the biggest problem is less that the | |
| disasters have gotten worse, but that we have moved to the | |
| disasters in a very big way. And, of course, I do think our | |
| subsidies have been a very big part of that. | |
| Ms. GRAVELLE. If you are thinking about vacation homes on | |
| the coast and things like that, obviously one thing to consider | |
| would be to disallow some of these deductions for second homes. | |
| But aside from that, I mean, there is still, for wealthy people | |
| who are doing this, for high incomes, there is still the | |
| exclusion of imputed rent. Even if you don't have a mortgage | |
| interest deduction, if you don't have a mortgage, you still are | |
| not implicitly paying tax on that. And that is a trickier thing | |
| to try to attack. | |
| The other thing is, again, I just know a little bit about | |
| the whole flood issue, but I think most economists would say | |
| the fundamental problem here is not a proper market pricing of | |
| flood insurance. So if you have something that floods and you | |
| know you can expect it all the time, then the insurance should | |
| reflect the price of that, and then you leave, you know, the | |
| benefits for extraordinary, unusual calamities. | |
| Mr. SWAGEL. Right. I was just going to echo that. The flood | |
| insurance program has the unintended effect that you mentioned. | |
| And we see that in the State of Florida, which has almost | |
| driven private insurance out of the home sector. | |
| Mr. BLUMENAUER. Mr. Chairman, just one subset, and I will | |
| yield back my time in a moment. But it just seems to me that | |
| one of the things that ought to be examined, if you are going | |
| to be subsidizing second homes, for instance, with a mortgage | |
| interest deduction, at a minimum, the reduction for people that | |
| are in extreme--and it is not just flood. I mean, we have | |
| places in the flame zone. One in four homes in the flame zone | |
| is a second or third or fourth home, where we are paying huge | |
| sums of money in the west to try to protect them and then we go | |
| in afterwards. | |
| And I would think that this might be something that is | |
| worth looking at that wouldn't be wildly disruptive to a real | |
| estate market. It might actually help stabilize it, but it | |
| would prevent the taxpayers from paying two or three times in | |
| areas where the costs are going up exponentially. | |
| Chairman CAMP. All right. | |
| Mr. BLUMENAUER. Thank you, Mr. Chairman. | |
| Chairman CAMP. Thank you. | |
| And I think we are done with our questions. So I want to | |
| thank this panel of witnesses for their testimony. The | |
| Committee greatly appreciates your testimony and your | |
| perspectives. And I also want to ask that if there are any | |
| questions that you want to submit in writing, we can add those | |
| to the formal hearing record. So, again, thank you for being | |
| here. | |
| I would like to call our next panel of witnesses forward, | |
| please. | |
| Mr. LEVIN. Mr. Chairman. | |
| Chairman CAMP. Also, I would like to recognize Mr. Levin. | |
| Mr. LEVIN. I would also like to thank the panel. | |
| And as we are shifting here, there is a gentleman behind | |
| me, Mike Hauswirth, who has been a valuable member of our staff | |
| since February of 2011, and before that, he was on Joint Tax. | |
| Mike is going to be leaving us to undertake new adventures. And | |
| I would like all of us to join in thanking Mike for all of your | |
| service both on our tax staff, but also on Joint Tax. | |
| Chairman CAMP. Thank you. And if our second panel could | |
| come forward, please. I appreciate your patience this morning. | |
| I know many of you were in the room during all of the first | |
| panel. | |
| Now I would like to welcome our second panel, I know all of | |
| whom bring important perspectives on the residential real | |
| estate industry with them. | |
| And, again, thank you for your patience. I saw you sitting | |
| in the room during all the morning testimony. | |
| First, I would like to welcome Gary Thomas, President of | |
| the National Association of Realtors. Mr. Thomas has worked in | |
| realty for over 35 years. | |
| Second, we will hear from Robert Dietz, Assistant Vice | |
| President for Tax and Policy Issues at the National Association | |
| of Home Builders. Mr. Dietz formerly served as a revenue- | |
| estimating economist for housing issues at the Joint Committee | |
| on Taxation. | |
| Third, we will hear from Thomas Moran, Chairman and | |
| Managing Partner of Moran & Company in Chicago, Illinois, also | |
| appearing on behalf of the National Multi Housing Council and | |
| the National Apartment Association. Mr. Moran has specialized | |
| in private housing development for over four decades. | |
| Finally, we will hear from Robert Moss, a Senior Vice | |
| President at Boston Capital in Boston, Massachusetts, also | |
| appearing on behalf of the Housing Advisory Group in Boston. | |
| Mr. Moss serves on the boards of at least five housing | |
| associations. | |
| Again, thank you all for being with us today. The Committee | |
| has received each of your written statements and they are part | |
| of the formal hearing record. Each of you will be recognized | |
| for 5 minutes for oral remarks. | |
| And, Mr. Thomas, we will begin with you. Welcome. And you | |
| are recognized for 5 minutes. | |
| STATEMENT OF GARY THOMAS, PRESIDENT, | |
| NATIONAL ASSOCIATION OF REALTORS, WASHINGTON, DC | |
| Mr. THOMAS. Thank you. Chairman Camp, Ranking Member Levin, | |
| and Members of the Committee, thank you for this opportunity to | |
| testify on behalf of the 1 million members of the National | |
| Association of Realtors, who practice in all areas of | |
| residential and commercial real estate. | |
| My name is Gary Thomas and I serve as the 2013 President of | |
| the National Association of Realtors. And I, like most | |
| Americans, agree that a major goal of tax reform should be | |
| simplification. But simplification does not necessarily equal | |
| elimination. The Code currently contains simple, easy-to- | |
| understand housing-related tax provisions, enjoyed by millions | |
| of Americans, that have helped facilitate home ownership, build | |
| wealth, and provide stability to families and communities. | |
| In case there is any doubt, Realtors support maintaining | |
| current law for residential real estate tax provisions. | |
| Specifically, we urge you to maintain the current deduction for | |
| home mortgage interest, the deduction for real property taxes | |
| paid, and the capital gains exclusion for proceeds from the | |
| sale of a principal residence. | |
| My written testimony details these and other provisions, | |
| but I would like to focus on the mortgage interest deduction. | |
| Let me first clarify who benefits from the MID. In 2010, 37 | |
| million tax filers claimed the mortgage interest deduction. Of | |
| those filers, 63 percent earned less than $100,000 and 91 | |
| percent earned less than $200,000. Roughly half of those | |
| claiming the MID were under the age of 45. Many of these filers | |
| also claimed dependents or credits for children. Moreover, | |
| homeowners pay between 80 and 90 percent of all Federal income | |
| tax. | |
| If you want to know the majority beneficiary of the MID, | |
| the answer is not the rich; rather, it is young middle-class | |
| families with children who already carry more than their fair | |
| share of the tax burden. If Congress were to eliminate the | |
| mortgage interest deduction, it could mean an average tax | |
| increase of over $2,500 per family. | |
| Realtors realize that most believe Congress would not | |
| attempt to completely eliminate the MID. We hope they are | |
| right. However, there have been several proposals to change the | |
| deduction or eliminate it for certain taxpayers. Let me briefly | |
| respond to three of the most frequently mentioned proposals. | |
| One proposal would eliminate the deduction for second | |
| homes. While critics portray second homeowners as millionaires | |
| with mansions by the ocean, this ignores the facts. NAR | |
| research shows that the median income of a second-home buyer | |
| last year was $92,000 and the home they purchased cost | |
| $150,000. NAR research further shows that second-home sales | |
| make up 10 percent of all home sales each year. And all but one | |
| State has at least one county where 10 percent or more of their | |
| real estate market is composed of second homes. The economic | |
| impact second homes have on these communities should not be | |
| ignored, either. | |
| Another proposal is to cut the amount of eligible mortgage | |
| debt that can be deducted in half. While $500,000 might buy the | |
| most expensive house in some of your districts, in my own | |
| market, in Southern California, it might buy a starter home. | |
| Homeowners in high-cost markets already pay a higher percentage | |
| of their income for housing than those in less expensive parts | |
| of the country. This proposal would make home ownership even | |
| more expensive in markets where affordability is already a | |
| problem. | |
| Finally, we have heard proposals to change the deduction to | |
| a tax credit. While this discussion of credits versus | |
| deductions may make for great debate, the bottom line for | |
| current homeowners is this: If you are in a tax bracket higher | |
| than the credit amount, a credit will cause your taxes to go up | |
| and the value of your home to go down. | |
| Housing has helped lead us out of four of the last six | |
| recessions, and it appears to be doing so again. Americans are | |
| regaining confidence in real estate. Demand is increasing, and | |
| so are home prices. The greatest hurdle to full recovery in | |
| housing is uncertainty here in Washington. | |
| The mortgage interest deduction, along with other tax | |
| provisions, makes sustainable home ownership more affordable | |
| for millions of middle-class families who are the backbone of | |
| America. Congress must remember this as it pursues tax reform, | |
| and first, do no harm. I look forward to answering your | |
| questions. Thank you very much. | |
| [The prepared statement of Mr. Thomas follows:] | |
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| Chairman CAMP. Well, thank you, Mr. Thomas. | |
| Mr. Dietz, you are recognized for 5 minutes. | |
| STATEMENT OF ROBERT DIETZ, ASSISTANT VICE PRESIDENT FOR TAX AND | |
| POLICY ISSUES, NATIONAL ASSOCIATION OF HOME BUILDERS, | |
| WASHINGTON, DC | |
| Mr. DIETZ. Thank you for the opportunity to testify today. | |
| My name is Robert Dietz, and I am an economist with the | |
| National Association of Home Builders. NAHB represents all | |
| sectors of residential real estate development, single family, | |
| multifamily, remodeling, and businesses connected with | |
| supplying and financing those activities. | |
| Homebuilding is an industry dominated by small businesses, | |
| so the idea of a simpler, less complex Tax Code has great | |
| appeal. At the same time, our industry remembers painful | |
| lessons from the 1986 Tax Reform Act when the commercial and | |
| multifamily sectors experienced a downturn due to unintended | |
| consequences. For this reason, we urge you to be cautious and | |
| thoughtful when it comes to housing and tax reform. | |
| We have seen over the last 5 years the influence housing | |
| can have. When housing fares well, it is positive for the | |
| economy. The year 2012 was a year of expansion off of great | |
| recession lows, but recent data, such as NAHB's measure of | |
| builder confidence, has suggested the recovery will have starts | |
| and stops. In particular, the share for some home buyers | |
| remains below historic norms. | |
| Given the state of the industry, I would like to highlight | |
| a few key tax issues. NAHB strongly supports the Low Income | |
| Housing Tax Credit. Created in the 1986 reform effort, it is | |
| the most effective tool for the creation of affordable rental | |
| housing. Utilizing a public-private partnership to attract | |
| investment, the tax credit has created over 2 million | |
| affordable rental units. The needs for such housing remain | |
| significant and we strongly urge the Committee to protect this | |
| program. | |
| Also, the completed contract rules in Section 460(e) are | |
| essential to homebuilders and offer a case in point about tax | |
| reform. Absent this fix to changes made in 1986, many builders | |
| would need to pay taxes on homes prior to sale. | |
| However, when it comes to housing, the spotlight typically | |
| falls on the mortgage interest deduction, or MID. A few | |
| thoughts. First, we frequently hear few homeowners benefit from | |
| the MID because itemization is required. In fact, most | |
| homeowners will claim it. In 2009, for example, 35 million | |
| taxpayers claimed the MID out of 50 million homeowners with a | |
| mortgage. This means, of homeowners with a mortgage, 70 percent | |
| claimed the MID in that year. And typically more than 80 | |
| percent of mortgage interest paid by homeowners is reported as | |
| a deduction. Over the course of a homeowner's time of | |
| ownership, the majority will claim the MID for years at a time. | |
| It is also claimed that the MID encourages the purchase of | |
| a larger home. These claims ignore the role of family size. The | |
| data show that larger families see a larger benefit, which is | |
| intuitive with the notion that families with children require | |
| larger homes. Also, the cost of housing varies greatly across | |
| the Nation, so what may appear to be a large deduction may | |
| reflect a modest home. | |
| Moreover, the MID and the real estate tax deductions are | |
| two of the few elements in the Tax Code that account for | |
| differences in cost of living. Indeed, the real estate tax | |
| deduction is an important reminder that homeowners pay over | |
| $300 billion in property taxes each year. This fact is often | |
| ignored in Federal tax debates, because these taxes are | |
| collected by State and local governments. | |
| There is also a connection between the age of a homeowner | |
| and the resulting benefit of the MID. As a share of household | |
| income, the largest deductions are for those 35 and younger. | |
| This makes sense, because these are the homeowners that are | |
| paying more interest in the early years of a mortgage. | |
| Given this demographic connection, NAHB believes that any | |
| policy change that makes it harder to buy a home or that delays | |
| the purchase of a home will have a significant impact on the | |
| wealth accumulation and makeup of the middle class. | |
| Now, a few thoughts on the MID rule for second homes. While | |
| many think of expensive beach property, such homes are often | |
| owned free and clear or rented, which excludes them from the | |
| MID. In practice, the second home deduction is important for | |
| many who do not think of themselves as owning two homes. For | |
| example, the second home deduction facilitates moving when | |
| owning two homes during the tax year. The second home MID rules | |
| also permit existing homeowners to claim interest on a | |
| construction loan for a future home being built. | |
| Repeal of the second home MID rules would affect large | |
| sections of the country in nearly every State. There would be | |
| negative economic consequences in terms of lost home sales, | |
| home construction, and lost tax revenues. | |
| How housing is treated in any future tax reform will shape | |
| the economy going forward. This is particularly important now. | |
| Housing provides the momentum behind an economic recovery, | |
| because homebuilding and associated businesses employ such a | |
| wide range of workers. Housing could be a key engine of job | |
| growth that this country needs. | |
| As the Committee moves forward on tax reform, NAHB wants to | |
| be a constructive partner. Thank you, and I look forward to | |
| your questions. | |
| [The prepared statement of Mr. Dietz follows:] | |
| [GRAPHICS NOT AVAILABLE IN TIFF FORMAT] | |
| Chairman CAMP. Thank you very much. | |
| Mr. Moran, you are recognized for 5 minutes. | |
| STATEMENT OF THOMAS F. MORAN, CHAIRMAN AND MANAGING PARTNER, | |
| MORAN & COMPANY, CHICAGO, IL, ON BEHALF OF THE NATIONAL MULTI | |
| HOUSING COUNCIL AND THE NATIONAL APARTMENT ASSOCIATION | |
| Mr. MORAN. Thank you. Chairman Camp and Ranking Member | |
| Levin, the National Multi Housing Council and the National | |
| Apartment Association would like to thank you for this | |
| opportunity to testify on the multifamily industry's priorities | |
| for tax reform. | |
| My name is Tom Moran. I am the Chairman of Moran & Company | |
| from Chicago. I have been in the multifamily business for 40 | |
| years. My firm operates nationwide. We develop, own, manage, | |
| and sell apartments. I happen to also be a CPA and a lawyer, | |
| and I am acutely aware of the critical tax issues confronting | |
| our apartment industry. | |
| The apartment industry builds vibrant communities by | |
| offering housing choices. Currently, there are 19.3 million | |
| apartment units with 35 million residents, which contribute | |
| $1.1 trillion annually to the economy and helps support nearly | |
| 26 million jobs. The demand for apartments continues to grow | |
| thanks to the changing demographic. Harvard University research | |
| shows that half of all the new households formed this decade | |
| could be renters, which is up to 7 million. Home ownership has | |
| declined from 69.2 percent to 65.5 percent in December of 2012. | |
| A 1 percent change in home ownership represents approximately | |
| 1.1 million new apartment households. | |
| The demand for apartments is surging, but supply is not | |
| keeping up. We need to build at least an estimated 300,000 to | |
| 400,000 units per year, yet last year we delivered only 158,000 | |
| units. | |
| Like many small businesses, the apartment industry has a | |
| considerable stake in tax reform. We ask that tax reform take | |
| special care not to harm the thousands of existing real estate | |
| businesses which provide housing for 35 million residents. | |
| First, we believe that tax reform must be comprehensive and | |
| encompass both individual and corporate taxes, but done at the | |
| same time. | |
| Second, more than 75 percent of all real estate businesses | |
| are formed as partnerships or LLCs, which are flow-through | |
| entities where the owners and individuals are taxed | |
| individually each year at ordinary income tax rates except in | |
| the year of sale. These entities set forth the risk and | |
| obligations of the operating partner, the financial obligations | |
| of the investing partners. These documents are extensively | |
| negotiated and are an integral part of the real estate industry | |
| as well as other small businesses. Tax reform should not affect | |
| the way that business is transacted in the future, and the | |
| current regulations pertaining to capital debt and bases should | |
| not be changed. | |
| Third, the carried interest proposal as drafted should not | |
| apply to real estate since real estate developers and owners | |
| take substantial risks in developing and rehabbing real estate. | |
| They take development risks in buying the land, zoning the | |
| property, and guaranteeing the construction costs. They take | |
| financial risks in securing a construction loan with a 100 | |
| percent construction guarantee and a 25 percent payment | |
| guarantee. They have investor risk. If you do not find an | |
| investor, you can lose your entire investment. If you secure an | |
| investor, he will receive a negotiated return and recoup his | |
| investment prior to any return on the carried interest. | |
| The current interest proposals do not have a current | |
| effective date. It applies to all buildings and partnerships | |
| retroactively. Thus, if you have owned a building for 30 years | |
| and have a substantial profit, primarily due to cost inflation, | |
| the carried interest proposal would be retroactively | |
| recharacterizing the capital gain to ordinary income. This | |
| retroactive recharacterization of ordinary income is most | |
| unfair and would cause transactional havoc in partnerships, | |
| where the general partners would be taxed at 40 percent and the | |
| limited partners at 20 percent. Real estate developers take the | |
| risk, create the jobs, and should be taxed at lower capital | |
| gain rates, the same as founder shares and other capital | |
| assets. | |
| Tax reform must retain 100 percent deduction for business | |
| interest. Real estate buildings are expensive and debt is a | |
| major portion of the capital stack. Thus, interest is an | |
| ordinary and necessary expense of doing business. | |
| Fourth, we must protect and make permanent the Low Income | |
| Housing Tax Credit, since Harvard is currently estimating that | |
| we have a shortage of at least 3 million affordable units. | |
| Fifth, tax reform should respect and not change the estate | |
| tax legislation enacted in January of this year. | |
| Finally, we strongly support extending and modifying the | |
| 179 energy provisions by enabling more properties to qualify | |
| for the incentive. | |
| On behalf of the apartment industry and our 35 million | |
| residents, we thank you for the opportunity to testify today | |
| and we look forward to answering any questions you may have. | |
| [The prepared statement of Mr. Moran follows:] | |
| [GRAPHICS NOT AVAILABLE IN TIFF FORMAT] | |
| Chairman CAMP. Well, thank you, Mr. Moran. | |
| Mr. Moss, you are recognized for 5 minutes. | |
| STATEMENT OF ROBERT MOSS, SENIOR VICE PRESIDENT, BOSTON | |
| CAPITAL, BOSTON, MA, ON BEHALF OF THE HOUSING ADVISORY GROUP | |
| Mr. MOSS. Chairman Camp, Ranking Member Levin, Members of | |
| the Committee, thank you for inviting me to appear today to | |
| discuss the Low Income Housing Tax Credit. My name is Bob Moss | |
| and I am the Senior Vice President for Affordable Housing at | |
| Boston Capital, a real estate finance and investment firm that | |
| raises capital for investment in affordable rental housing. I | |
| am here today also on behalf of a broad coalition of over 450 | |
| State, national and local affordable housing organizations, the | |
| Affordable Rental Housing Action Campaign. | |
| The housing credit is a bipartisan product of tax reform | |
| and a permanent feature of the Tax Code. Today the housing | |
| credit is generally recognized as the most successful housing | |
| production and preservation program. The housing credit is | |
| actually two programs. First, it is a capped tax credit program | |
| where States receive an annual amount of tax credits based on | |
| their population, and second, it is a bond credit program which | |
| combines fewer tax credits with tax-exempt multifamily bonds. | |
| One of the essential elements of the housing credit program | |
| is the role that State housing finance agencies play in | |
| administering the program. States annually prepare and publish | |
| qualified allocation plans that lay out State housing needs and | |
| priorities after soliciting public input through a transparent | |
| and open process. | |
| Our Nation is experiencing a crisis in affordable housing. | |
| This is not a new crisis, but it has grown worse in recent | |
| years. One quarter of all renters pay half or more of their | |
| income in rent. Nearly two-thirds of extremely-low-income | |
| household renters pay at least half of their income in rent. | |
| And the reason low-income households face such high rent | |
| burdens is the shortage of affordable housing. On average, | |
| State housing finance agencies receive applications annually | |
| for more than twice as much housing credit as they have | |
| available. | |
| Federal priorities have a major impact in how States run | |
| their housing credit program. And while the statute permits | |
| targeting to households with incomes up to 60 percent of area | |
| median income, according to a recent study by the Furman Center | |
| at New York University, the program in fact reaches much | |
| further down the income scale, where the need is greatest. | |
| Since the housing credit program was established in 1986, | |
| it has made possible the development of more than 2.5 million | |
| rental homes. Each year about 100,000 new rental homes are | |
| developed or preserved under the program. This program also | |
| accounts for 95,000 jobs annually. This produces almost $8 | |
| billion of local income through wages for workers and profits | |
| for small businesses, and about $1 billion in taxes and other | |
| revenues for local governments. | |
| The housing credit serves the full spectrum of housing | |
| need, including housing for families, seniors, people with | |
| special needs, veterans, and the homeless, in all geographic | |
| areas. Many local governments have used the housing credit over | |
| the years to spark neighborhood revitalization and help restore | |
| blighted areas. | |
| There are several key elements of the program that have led | |
| to its success. First, State housing finance agencies | |
| administer the program. This ensures that properties are | |
| developed according to local housing needs. Second, the private | |
| sector provides market discipline. And, third, the housing | |
| credit program is well designed within the Internal Revenue | |
| Code. Tax credits are not earned until the development is | |
| completed, it is in operation and housing qualified residents. | |
| This means that real estate construction and other risks are | |
| borne by the private sector, not the Federal Government. | |
| This threat of recapture imposes a powerful discipline on | |
| the program that ensures the properties are properly | |
| underwritten at the outset and diligently managed throughout | |
| the compliance period. Housing would not be built or preserved | |
| but for the capital contributed because of the housing credit. | |
| It is a safety net program that requires continued Federal | |
| support. | |
| This Committee did great work in 1986 when it created the | |
| housing credit. You designed a critically important program to | |
| maximize its efficiency, ensure investment occurs where it is | |
| needed the most, and harness private sector business discipline | |
| to achieve an important public policy objective. | |
| I thank you for the opportunity to address you today. Thank | |
| you. | |
| [The prepared statement of Mr. Moss follows:] | |
| [GRAPHICS NOT AVAILABLE IN TIFF FORMAT] | |
| Chairman CAMP. Well, thank you. Thank you all very much. | |
| Mr. Thomas, this is directed at you. What is the biggest | |
| hurdle for people when they are buying a home? Is it having | |
| enough for the downpayment, especially now that we moved away | |
| from the zero-down loans that really helped fuel the subprime | |
| mortgage crisis? Is it interest rates? Is it some other factor, | |
| in your opinion? | |
| Mr. THOMAS. Well, it depends on the time of which you are | |
| speaking. If you are speaking of today, it is probably | |
| downpayment, because leaders are requiring more downpayment on | |
| loans other than FHA or VA, and so you have a bigger hurdle | |
| with the downpayment. | |
| Chairman CAMP. All right. | |
| Mr. Dietz, any comment on that? Is that your thought as | |
| well? | |
| Mr. DIETZ. The downpayment is a challenge. Labor market | |
| stability, wage growth, as the previous panel mentioned. | |
| Appraisals are a serious challenge. You can qualify for a | |
| mortgage, but if the appraisal comes in and says the home is | |
| inconsistent with where the appraisal is, then the sale falls | |
| through. And that is a problem for building as well as for home | |
| buyers. | |
| Chairman CAMP. All right. Just to sort of educate me and | |
| the Committee about the actual real estate market, what | |
| percentage of the market is first-time home buyers? | |
| Mr. THOMAS. It is generally about a third. At the present | |
| time it may not be quite that high because there has been such | |
| an influx of investor buyers, and so it has forced a lot of the | |
| first-time home buyers out of the market, because they are | |
| having to compete for homes. It is very difficult. In my own | |
| area, we have a 1-month supply of homes, and so the first-time | |
| home buyer is really at a disadvantage. | |
| Chairman CAMP. Sure. And what percentage would be so-called | |
| second homes? And is that obviously in regions of the country-- | |
| -- | |
| Mr. THOMAS. Sure. | |
| Chairman CAMP [continuing]. You know, second homes probably | |
| make up a larger portion of that. | |
| Mr. THOMAS. Like in yours. | |
| Chairman CAMP. Yes. Especially in the northern part. | |
| Mr. THOMAS. Correct. | |
| Chairman CAMP. Just in general, though, I mean. | |
| Mr. THOMAS. Typically it is about 10 percent. | |
| Chairman CAMP. All right. What percentage of that second- | |
| home market is, as I think some of you said, and I think you | |
| said in your testimony, people that are, say, maybe moving and | |
| they have two homes or they are getting ready for retirement | |
| and they buy a second home 5 years before they are going to | |
| retire? What percentage of that second-home market is that sort | |
| of---- | |
| Mr. THOMAS. Unfortunately, we don't have statistics based | |
| on exactly what that is, but we know that as people are moving | |
| across the country or even within a given area, that this is a | |
| factor. But there are a lot of people that do buy second homes | |
| in anticipation of retiring into them, so that is a big | |
| percentage. | |
| Chairman CAMP. That is what I was wondering about. | |
| Mr. THOMAS. Yeah. | |
| Chairman CAMP. And in terms of home values, how do home | |
| values break down nationwide? I mean, what are between, say, | |
| zero and 100, 100 to 200, 200 to 300? Do you have that, or if | |
| not, can you get that to me? | |
| Mr. THOMAS. I can get it to you. | |
| Chairman CAMP. All right. | |
| I wondered, Mr. Moss, if you just wanted to comment on the | |
| previous panel. There was a lot of testimony about the | |
| incentives in the Low Income Housing Tax Credit and maybe it | |
| should go more to the individual as opposed to the way it is | |
| structured now. I don't know if you had a chance to think about | |
| that and if you had any comment on that. | |
| Mr. MOSS. Well, in looking at---- | |
| Chairman CAMP. You may want to hit your microphone. | |
| Mr. MOSS. Sorry. | |
| If you look at most of the tax credit properties right now, | |
| in terms of achieving deeper targeting, they do. If you look at | |
| the Furman Center study and the type of targeting that is going | |
| on across the country, most tax credit properties are not just | |
| set at 60 percent of area median income. They serve levels at | |
| 40, at 30 percent of median income. So there is some targeting | |
| going on there that would not be achievable under any other | |
| program. And especially with the private capital coming in to | |
| leverage these properties, it is not achievable under any other | |
| type of spending program. | |
| Chairman CAMP. In terms of the supply of low-income | |
| housing, is it in a shortage all over the country or are there | |
| regions that that is less the case? | |
| Mr. MOSS. The universe of affordable housing, when you | |
| start to talk about all the population types, is dramatic. As I | |
| mentioned in my testimony, we are now doing a lot of housing | |
| for veterans, returning veterans. There is a shortage. There is | |
| a great shortage of affordable housing in the United States in | |
| all areas. The nice and the great part about the credit is it | |
| is flexible and it can serve to provide housing for a lot of | |
| different housing types. | |
| Chairman CAMP. I guess I didn't ask that the right way. Are | |
| there areas of the country where the need is greater than | |
| others? | |
| Mr. MOSS. Certainly in higher population areas where there | |
| is more employment, there is probably more of a need. But also | |
| you have to remember that the bond program serves as a useful | |
| tool in those areas as well, not just the capped credit. And | |
| you are going to see that there is, if you look at the credits | |
| across the country with the per capita allocation formula, | |
| there is very little that spills over into the national pool | |
| that is unused, if any at all. | |
| Chairman CAMP. Mr. Thomas, what is your view on the 28 | |
| percent cap in the President's budget? | |
| Mr. THOMAS. We don't support that. We think that is going | |
| to raise the rate for many people as to what they actually pay. | |
| So it has generally a detrimental effect. | |
| Chairman CAMP. All right. | |
| Mr. Dietz, do the Home Builders have a position on that? | |
| Mr. DIETZ. We are opposed to the 28 percent cap, too. And | |
| just to add an item, you know, something you don't see | |
| discussed a lot is that the proposal has grown over time as it | |
| has appeared in the President's budget proposals year by year. | |
| It now includes the Section 199 deduction, which would affect a | |
| lot of pass-through businesses, other exclusions. So that is an | |
| issue. | |
| Chairman CAMP. All right. Thank you. | |
| Mr. Levin is recognized. | |
| Mr. LEVIN. Welcome. You know, I think it is so important | |
| for us to dig out the facts, and I think what you have | |
| testified to helps us. | |
| I am not in favor of the status quo. I am also not in favor | |
| of changes that don't take into account the realities. For | |
| example, second homes, Mr. Chairman, I think you and I might | |
| agree, I-75 people come up your way on Fridays, and I try to | |
| move up I-75 in the suburban area. And when you take into | |
| account who is traveling up I-75 from Detroit and suburban | |
| Detroit up north, my guess is I think a lot of them are going | |
| to small second homes. And I think we simply need to be careful | |
| about our proposals. | |
| I also think, though, that we need to make sure that we are | |
| not opposed to everything. The 28 percent proposal of the | |
| President relates to some of the facts that came out earlier, | |
| and that is, who is benefiting, who is taking advantage of | |
| accessing the deduction. And in terms of numbers, the largest | |
| numbers by far are people under $200,000. It is also true that | |
| proportionately a very substantial amount goes to people in | |
| higher income brackets. And so I think we just need to take a | |
| hard look at that. | |
| Also, I think we would welcome you, if you don't have time | |
| through my questions, to take a look at the testimony of others | |
| before you, because, for example--by the way, Mr. Moran, I am | |
| not going to ask you questions about carried interest, because | |
| it doesn't really relate directly to this hearing. The carried | |
| interest issue covers more than real estate. So let's have that | |
| discussion some other time. Okay? We have been working hard on | |
| it and want your views. So many people take risk of all kinds, | |
| and they pay ordinary income tax on the benefits. Sometimes | |
| they don't receive any benefits from the risky economic effort. | |
| But I think it would be useful if you would take a look at | |
| the testimony that came before. And it was really striking, Mr. | |
| Toder, if I pronounced his name correctly, on page 7 has this | |
| paragraph: ``Some empirical research and observations confirmed | |
| this lack of a relationship between the MID and home ownership | |
| rights.'' | |
| I think you need to look at testimony like this and give us | |
| further indications as to the relationship. For example, I | |
| think maybe it was you, Mr. Renacci, I am not sure, who said | |
| that when people buy a house they don't look at what their | |
| mortgage payment will be in terms of taxation. I find that | |
| somewhat hard to understand. I would think most people who are | |
| going to itemize if they buy a house would take note of what | |
| their monthly payment really would be on their mortgage. I | |
| think all of us do that all the time who have mortgages. | |
| So I think it would be useful for you to take a look at the | |
| testimony that came earlier--and thank you for your patience-- | |
| and give us your views on that. | |
| And the same on low-income housing, because while the | |
| testimony has been basically positive, I am afraid that there | |
| may be suggestions that we would significantly change that. And | |
| I am not in favor of the status quo, but I think going after | |
| these important policies, it is not a loophole, the Low Income | |
| Housing Tax Credit, it is a policy adopted by this country on a | |
| bipartisan basis, and I think we better be careful before we | |
| significantly tamper with it. | |
| My time is up. But give us your further ideas. Go back over | |
| the testimony that we heard earlier and give us any comments, | |
| if you would. | |
| Chairman CAMP. All right. Thank you. | |
| Mr. Johnson is recognized. | |
| Mr. JOHNSON. Thank you, Mr. Chairman. | |
| I would like to start with Mr. Thomas and Mr. Dietz, if you | |
| don't mind. On July the 11th, the Joint Committee on Taxation | |
| issued a report on the tax treatment of household debt, and in | |
| that report there is a chart which shows a surge in home | |
| mortgage debt from around 2002 through 2007. I asked them about | |
| that at a hearing we had back in July a couple years ago, and I | |
| wanted to share with you what Joint Tax had to say in a | |
| followup letter addressed to me and get your reaction. | |
| According to Joint Tax, ``Given that the home mortgage | |
| interest deduction has become less valuable over time, the | |
| deduction does not appear to explain the increase in home | |
| mortgage debt from 2002 to 2007.'' I would like to know your | |
| thoughts about this. First, Mr. Thomas. | |
| Mr. THOMAS. Well, I am not sure there is a correlation | |
| there. I think that the basics of having the mortgage interest | |
| deduction allows people to take that deduction and it allows | |
| for people to buy a home, especially a first-time home. | |
| You know, the thing that most people don't understand is | |
| that you can't take a snapshot at any one given time and get a | |
| clean picture of the people that are taking advantage of the | |
| mortgage interest deduction. It is really more like a movie, | |
| because the majority that take advantage of the deduction are | |
| younger and they are building their families and they are | |
| starting out, so that a greater portion of their income goes | |
| toward the debt of a home. And the mortgage interest deduction | |
| is very important to them, because it allows them to buy the | |
| size home they need in the community they are in. And that is | |
| all factored in when they apply for a loan, because the lender | |
| will look at what the mortgage deduction is going to do for | |
| them, and that allows them to purchase as much as they can. | |
| Over time, as they pay the mortgage down, the interest | |
| deduction is less meaningful, or if they pay their home off, or | |
| if they decide in later years to downsize. So all of those | |
| factors have to be taken into consideration. | |
| A lot of what we saw in the buildup during that period of | |
| time was really due to the price of housing. It had nothing to | |
| do with what the mortgage interest deduction did to it. It was | |
| really in the pricing of homes. | |
| Mr. JOHNSON. Mr. Dietz. | |
| Mr. DIETZ. I agree with the Joint Tax conclusion. When you | |
| look at the run-up in debt, the run-up in housing earlier in | |
| the decade, it was a lot of speculative bubbles, flippers and | |
| such. The way that the mortgage interest deduction's benefits | |
| accrue are, as he mentioned, sort of life cycle, and so they | |
| are over a number of years. The MID is not going to fuel a | |
| speculative bubble. | |
| And if you want a cross-country comparison, an experiment, | |
| so to speak, you can look at when we had housing bubbles in a | |
| number of countries around the world. They obviously don't have | |
| the same tax laws that we do, so, you know, it is hard to make | |
| a connection between the two, so I think Joint Tax is correct. | |
| Mr. JOHNSON. Well, I thank you for that. | |
| Mr. Thomas, and also Mr. Dietz, I wanted to get your | |
| reaction to some points made by a couple of the witnesses on | |
| the first panel. Two of them, Eric Toder from the Tax Policy | |
| Center and Mark Calabria from Cato, both argue the mortgage | |
| interest deduction has really no effect on home ownership. I | |
| would like to know your thoughts on that. | |
| Mr. THOMAS. Well, I would greatly disagree with that. I | |
| think that it does affect home ownership. If you look at Great | |
| Britain, which is just in the process of reducing the mortgage | |
| interest deduction, the average homeowner entry level into home | |
| ownership is now advanced by 7 to 8 years, so it means that | |
| they are delaying home ownership by 7 to 8 years. A lot of that | |
| is due to the fact that they can't deduct their mortgage | |
| interest anymore. | |
| We think we would have the same problem. So we think that | |
| there is quite a correlation there. | |
| Mr. JOHNSON. It makes it cost more to get in it, doesn't | |
| it? | |
| Mr. THOMAS. Absolutely. | |
| Mr. JOHNSON. Yeah. | |
| Mr. DIETZ. I agree. I think it is not only an impact on the | |
| home ownership rate, the number of home-owning households in | |
| the country, but the timing of when they become homeowners. And | |
| that 7 years, using the United Kingdom as a good example, those | |
| are big years in terms of family events, household formations, | |
| marriage, children, and most importantly wealth accumulation | |
| over a long period of time, because home ownership is a vehicle | |
| for accumulating family wealth. | |
| Mr. JOHNSON. You know, the Tax Policy Center also argues | |
| that the mortgage interest deduction encourages upper-middle- | |
| class households to buy larger and more expensive homes. Cato | |
| makes a similar argument, in that the benefits of deductions | |
| are highly concentrated among both the highest income and | |
| mostly leveraged household. I would like your thoughts on that. | |
| Chairman CAMP. Yeah. Just briefly, please. | |
| Mr. THOMAS. Well, again, if you look at the statistics in | |
| our written testimony, that is contrary to what we have, which | |
| is that the vast majority of the benefit goes to people that | |
| are under $200,000 in income, and that a high percentage goes | |
| to those earning under $100,000. | |
| Chairman CAMP. Thank you. I do think we have to be careful | |
| in our comparisons to England, because they have large chunks | |
| of their country where you cannot get fee simple, you can only | |
| get a long-term lease, and that is a very different sort of | |
| model than we have in the United States. | |
| Mr. Rangel is recognized. | |
| Mr. RANGEL. Thank you so much, again, for your patience and | |
| for sharing your views with us. | |
| I was intrigued by Congressman Johnson's question as | |
| relates to the connection between mortgage interest deduction | |
| and purchases. About 10 years ago, or whatever time it was, in | |
| Miami, Florida, and throughout Florida, there seemed to be an | |
| overdevelopment of luxury condos, and there was the worry that | |
| wealthy people in New York could get a condo at a reasonable | |
| price without any downpayment based on the tremendous mortgage | |
| deduction that they would enjoy and the fact that there was | |
| continuous rapid appreciation of the property. | |
| Does that concept make any sense, that they wouldn't need a | |
| downpayment, just go down and buy a million-dollar condo based | |
| on that concept, appreciation and deductibility? | |
| Mr. THOMAS. Well, I think a lot of them did it because of | |
| their anticipation of appreciation. However, that makes no | |
| economic sense. No, it never did. And the type of lending that | |
| was allowed at that time, we don't want to see that again. So, | |
| you know, those were not good elements that went into buying a | |
| property. Those were not wise investments, obviously. | |
| Mr. RANGEL. Yeah, but I think if they still own the | |
| property and it did appreciate, I doubt whether they didn't pay | |
| any downpayment, but, you know, these wealthy people get | |
| together and share with each other the great economic ventures | |
| that they have had. And I am asking, is it possible that this | |
| could have happened, no matter what it looked like, that | |
| wealthy people could acquire property without any downpayment | |
| just based on appreciation and the fact that the tremendous | |
| monthly payments were--the interest was deductible and most of | |
| the early payments are interest and not principle? | |
| Mr. THOMAS. The majority of them are interest in the early | |
| months of---- | |
| Mr. RANGEL. Yeah. | |
| Mr. THOMAS [continuing]. Early years of a mortgage. | |
| Mr. RANGEL. Yeah. | |
| Mr. THOMAS. Absolutely. | |
| Mr. RANGEL. And so isn't it logical that those who did it, | |
| whether it is bad economics or not, if they still have those | |
| places, notwithstanding the fact that they have leveled off, | |
| that at that time it seemed like a good deal and it was? | |
| Mr. THOMAS. Well, at the time they purchased it, I am sure | |
| they thought it was a good deal. | |
| Mr. RANGEL. No, no. I didn't ask what they thought. They | |
| did it. But I don't know what happened to them since then. | |
| Mr. THOMAS. Well, a lot of those properties dropped in | |
| value dramatically. | |
| Mr. RANGEL. Okay. Let me get to the question of carried | |
| interest. I assume because you get a favorable and much lower | |
| rate with capital gains, that all of you would support it. I am | |
| trying to figure out why. What work would you do that would be | |
| different from anybody else that is not investing in the | |
| project so that their income would be an investment on capital, | |
| and therefore they gain, where other people, especially in the | |
| venture capital area, who do the same type of work, get taxed | |
| at a much higher rate because it is ordinary income? | |
| So with the real estate, recognizing that you take a risk, | |
| it is my understanding that anyone who opens a business or | |
| takes a position hoping that the business would increase is | |
| taking a risk. But what makes the real estate industry | |
| different so that their profits should be treated differently | |
| than someone that is being taxed at an ordinary income rate? | |
| Mr. Thomas. | |
| Mr. MORAN. Well, I am not sure they should be treated | |
| differently than somebody else taking the same type of risk, | |
| but the risk that we take in the real estate industry in | |
| building buildings, as you know, you are buying land and you | |
| are taking the risk on the land, you have to get it zoned, you | |
| are getting it zoned, you have to go hire architects, you hire | |
| lawyers, and you try to put your package together. And once you | |
| have spent a lot of money to put all that together, the key | |
| point is, are you generating an economic return that somebody | |
| will invest in? And if somebody doesn't invest in it, then you | |
| are going to lose all your money. | |
| Mr. RANGEL. But they would be the investor. | |
| Mr. MORAN. Pardon me? | |
| Mr. RANGEL. The investor would be the person that you are | |
| turning it over to. | |
| Mr. MORAN. No, no. I am not turning anything over to the | |
| investor. | |
| Mr. RANGEL. You don't keep the property---- | |
| Mr. MORAN. The investor is coming to me because I have the | |
| asset. He is looking to make a return on his money. And I am | |
| the one that is going to take all the risk to build the | |
| project, to go get the bank loans, to guarantee everything. | |
| Mr. RANGEL. Are all of you satisfied with---- | |
| Mr. MORAN. And the only thing the investor would---- | |
| Chairman CAMP. Well, I---- | |
| Mr. MORAN. Pardon me? | |
| Chairman CAMP. I think time has expired, but---- | |
| Mr. RANGEL. I just want to know. | |
| Chairman CAMP. I think, Mr. Thomas, we want to hear your | |
| answer on this, too, so we will make an exception here. | |
| Mr. RANGEL. You are a good Chairman. | |
| Chairman CAMP. I will remember that, Charlie. | |
| Mr. THOMAS. Well, we actually agree with the other speaker, | |
| and that is that this is something that we do a lot of work | |
| for. In many cases we forgo our commissions to put into the | |
| project, and so therefore we are invested in the project just | |
| like anybody else. It just doesn't mean that we write a check | |
| out of it. I guess we could if we took the commission and then | |
| turned around and put it back in. But there are rationales for | |
| making it the same as the investor. | |
| Chairman CAMP. All right. Thank you. | |
| Ms. Jenkins is recognized. | |
| Ms. JENKINS. Thank you, Mr. Chairman. | |
| As I am sure you are all aware, this Committee has spent | |
| the last 2 years having hearings and releasing discussion | |
| drafts, and we have been meeting with stakeholders from every | |
| industry to build a foundation as we seek to achieve what | |
| others have warned us is a nearly impossible feat of giving our | |
| constituents a simpler and fairer Tax Code. | |
| Mr. Thomas, in your testimony I read that the effect of the | |
| 1986 Act had an effect on the real estate industry. Can you | |
| just elaborate for us on what lessons the Committee Members can | |
| draw from the last time we overhauled the Tax Code as it | |
| concerns the real estate industry? | |
| Mr. THOMAS. Well, what it did to the commercial arena is | |
| that it really negatively affected prices and the exchange of | |
| property through that Tax Code change. So if you look at that | |
| as history and see that it decimated that particular industry | |
| and what it did to savings and loan institutions at the same | |
| time, you realize that is the negative effect that you are | |
| going to see or could potentially see if you did the same thing | |
| on the mortgage interest deduction. | |
| Ms. JENKINS. Okay. | |
| Yes, Mr. Moran. | |
| Mr. MORAN. May I respond to that question? On the 1986 Tax | |
| Act there were two things that were very, very detrimental to | |
| the commercial part of the business. One of them was | |
| retroactive. So a lot of people had made investments 2 or 3 | |
| years prior anticipating they would receive certain income tax | |
| deductions and the law would remain the same. Obviously, it did | |
| not. It changed. | |
| But the major change that caused all the problems was the | |
| passive loss rules. What happened is all the capital was coming | |
| into the commercial industry and all of it was coming into the | |
| apartment industry from individuals. That was your source of | |
| capital. And when you passed the passive loss rules and they | |
| couldn't take any of their deductions and they were making all | |
| these investments, therefore what we told them when they went | |
| in, we couldn't deliver, because the law changed. | |
| But the passive loss rules have taken the individual out of | |
| the market. Therefore, he wasn't supplying capital. Therefore, | |
| you had a recession from 1986 to 1994 before we started getting | |
| transactions going again and capital coming back into the | |
| business. And it started coming back in through the REITs and | |
| through the pension fund advisors, so you had two other types | |
| of entities. | |
| Today, for example, individuals are still not investing in | |
| real estate because of the passive loss rules. When you get to | |
| small towns and you get to secondary and tertiary towns where | |
| people in those towns used to invest in real estate, they don't | |
| do it because of the passive loss rules. Not only was it | |
| devastating between 1986 and 1994, you can still feel the | |
| effects today because you are saying where is the capital going | |
| to come from to help us fund our businesses? | |
| Mr. DIETZ. One more thing. As I mentioned in my testimony, | |
| the completed contract rules were another example in the 1986 | |
| Act where a change was made and a fix had to be made 2 years | |
| later. It is a reminder in general that real estate, the tax | |
| rules manifest themselves in the value of real estate. And so | |
| any impact on housing, for example, you get a 1 percentage | |
| point drop in housing prices today, it is going to destroy | |
| about $177 billion of net worth. You only need a 6 percent | |
| decline from where we are today to destroy a trillion dollars. | |
| So housing and the tax rules are very much connected. | |
| Ms. JENKINS. Okay. Great. The first panel today discussed | |
| some recent options that have been proposed as part of major | |
| tax reform, drafts to reform our tax policy as it relates to | |
| housing policy and promoting home ownership. Today's testimony | |
| noted | |
| that recent major tax reform proposals, including Simpson- | |
| Bowles, President Bush's 2005 Tax Reform Advisory Panel, and | |
| the Bipartisan Policy Center have all recommended moving from | |
| an interest deduction to a tax credit. And I understand that | |
| these proposals are concerning to some of you and potentially | |
| threaten our recovering housing industry. | |
| So could you just share with us, has the housing industry | |
| conducted any analysis on what these policies--what effect they | |
| would have on home prices? | |
| Mr. DIETZ. The real problem with the housing credits we | |
| have seen as a replacement for the MID is that the rates are so | |
| low they become nonstarters. A 12 percent rate is the most | |
| common. A revenue neutral tax credit would be something like 20 | |
| percent. So when it is down at 12 percent, you are really | |
| looking at a big tax hike for homeowners. | |
| In terms of price impacts, the impacts are going to be the | |
| largest in those high-cost areas. Where the average income is | |
| higher, the marginal income tax rate is going to be higher, so | |
| that represents a larger tax hike. | |
| Ms. JENKINS. Okay. I yield back. | |
| Chairman CAMP. Thank you. | |
| Mr. McDermott is recognized. | |
| Mr. MCDERMOTT. Thank you, Mr. Chairman. Mr. Moss, see, I | |
| come from Seattle where we spend a lot of effort politically | |
| passing initiatives for low-income housing and we have passed | |
| levies on almost a continuing basis for the last few years to | |
| build housing. So we have a lot of low-income housing that is | |
| managed by a variety of public agencies in some instances, and | |
| sometimes private nonprofits are running them. And we have | |
| Section 8 going on in our State like everybody else does. | |
| Tell me, from your point of view, the place where we ought | |
| to put our emphasis on low-income housing. Where should the | |
| money go if you are going to be the most effective? Is it in | |
| government building houses as we did before Ronald Reagan or is | |
| it in the low-income tax credit stuff in 1986 and thereafter or | |
| is it in Section 8? | |
| Because I see us coming to a point where we are having more | |
| and more old people in this society who are going to be looking | |
| for housing as they are forced out by taxes and other things. I | |
| am trying to figure out for the community where is the most | |
| effective--or what is the most effective way to put the housing | |
| up? | |
| Mr. MOSS. Well, first of all, starting in 1986 when the tax | |
| credit was put in place, the low-income housing tax credit, it | |
| started to replace all the failed Federal programs that had | |
| gone on prior to that time, programs that did not have the | |
| private sector involved, that did not have the private sector | |
| with risk in the game. | |
| And, today, the low-income housing tax credit is the | |
| highest performing real estate class in the United States of | |
| any real estate class because of the private sector | |
| involvement, because of the State agencies doing the oversight | |
| and the underwriting and assessing housing need, and due to the | |
| nature of the type housing that is being built, which is very | |
| high-quality housing. | |
| The programs from the past, the Federal programs, are now | |
| being preserved using the low-income housing tax credit. They | |
| are being regenerated by bringing in the private sector. | |
| Mr. MCDERMOTT. You mean you are taking the old federally | |
| built ones and turning them into low-income housing tax---- | |
| Mr. MOSS. Yes, sir. We are bringing in the investors, | |
| renewing the projects, making sure that the units are rehabbed | |
| in a sustainable fashion so they will last another 40 years. It | |
| is a very important role that the credit plays, in that it can | |
| play every position on the team. It can really fix rehab-- | |
| housing that needs rehab, Federal housing, it can do new | |
| construction, it can build housing for those individuals that | |
| have disabilities. It can build veterans housing. It is a very, | |
| very flexible program. I hope that answers your question. | |
| Mr. MCDERMOTT. There is one in Seattle named the McDermott | |
| Place which has 54 homeless veterans living in it, so I know | |
| about how it is done. But you didn't say anything about Section | |
| 8. Where does Section 8 fit in all of this? | |
| Mr. MOSS. Well, Section 8 is not an operating new | |
| construction--production program. | |
| Mr. MCDERMOTT. I know it doesn't produce, but it is a way | |
| of saying you haven't got a house, so here is a voucher. Go | |
| find someplace in the private sector that will take it. Is that | |
| a more effective way than building and operating it as low- | |
| income housing? | |
| Mr. MOSS. No, I don't believe it is. I believe that having | |
| the private sector involved---- | |
| Mr. MCDERMOTT. The private sector is involved in Section 8, | |
| aren't they? | |
| Mr. MOSS. They can be, where the project receives project- | |
| based funding or vouchers to support extremely low incomes | |
| which support the debt service for the property. But those | |
| Federal programs also had subsidies for debt when the | |
| properties are redone and rehabbed under the tax credit | |
| program. It is at conventional debt rates and the vouchers and | |
| the subsidy provide subsidy to the renter, not to the property. | |
| Mr. MCDERMOTT. What do you think the deficit is--excuse me. | |
| Go ahead. | |
| Mr. MORAN. On the Section 8 question, I agree. When prior | |
| to 1985 we did several projects and those projects were Section | |
| 8-based projects, that was when passive losses were not a | |
| limitation, so we had all private capital doing those. We still | |
| have those properties today and those investors are happy with | |
| that investment over all the years, but they needed the passive | |
| loss rules in order to get that deduction in order to bring | |
| that capital into the business. Project-based Section 8 works | |
| better than vouchers. | |
| Chairman CAMP. Mr. Renacci. | |
| Mr. RENACCI. Thank you, Mr. Chairman. I want to thank the | |
| panel for being here today. This morning I was talking with the | |
| earlier panel about simplification, how we have to make this | |
| program simpler, because that person that comes in with just a | |
| W-2 needs to be able to get their return done without a | |
| professional. As I said, I was a professional, I had a CPA | |
| practice for many years prior to coming here. | |
| On the other hand, I also indicated there are some people | |
| that aren't even aware that the interest deduction helps them, | |
| although it does, because of the complications of the Tax Code. | |
| And I think, after everything, they found out that the interest | |
| deduction was helpful to them. | |
| But one of the interesting comments in the earlier panel | |
| was somebody had indicated that repealing the mortgage interest | |
| deduction would reduce home prices by roughly 13 to 15 percent. | |
| Any comments on that? I thought that was an interesting number. | |
| Mr. THOMAS. Well, our number is very similar. The number | |
| that our economist has come up with is about 15 percent. That | |
| would be devastating to this economy if we were to do that. Do | |
| you understand what that would do, putting that many more | |
| people under water, that would increase the number of | |
| foreclosures again. It would blow way out of proportion. We | |
| believe it would throw the country back into a recession. So | |
| that would be devastating if it were 15 percent. | |
| Mr. DIETZ. Our numbers are--it is smaller, but similar. You | |
| could have dueling economists, what is the right price effect? | |
| It is going to differ by area, it is going to be larger in | |
| high-cost areas. But the big thing is it will impact. And I | |
| mentioned before, for every 1 percentage point, it is about | |
| $177 billion off of household net worth. If you are talking 15 | |
| percent, you are talking up to a $2 trillion windfall loss for | |
| homeowners. | |
| Mr. RENACCI. Mr. Moran, President Obama has proposed | |
| lowering the corporate tax rate to 28 percent. I heard in your | |
| testimony not only are you a CPA but you represent an industry | |
| that has a lot of partnerships and LLCs. What would you say to | |
| those who advocate for doing corporate tax reform only and how | |
| would it affect your members? | |
| Mr. MORAN. Our position has always been we are looking for | |
| comprehensive tax reform and to do both the corporate and the | |
| individual at the same time, because there would be crossovers | |
| on certain provisions. And we don't think one should be | |
| penalized--to bring down the rate over in the corporate, we | |
| shouldn't penalize the individual. So I think it should be | |
| looked at at the same time. We are not averse to the rate | |
| coming down. We think the rate should come down overall, | |
| because on a competitive basis to bring money into the United | |
| States we need to have a global rate that makes sense. And our | |
| global rate is higher than that of other people. | |
| Mr. RENACCI. But you are saying corporates, LLCs, | |
| partnerships should all be looked at as one corporate rate? | |
| Mr. MORAN. No, no, no, I do not say that. There is 2.5 | |
| million partnerships in this country. They control about $12 | |
| trillion of assets. They generate $400 billion a year in | |
| income. And all of those partnerships are there for a reason. | |
| There are different people putting up money. There are | |
| different people taking risks and they are allocated | |
| differently. So they don't run like corporations. | |
| Mr. RENACCI. I understand that, but when we look at | |
| corporate tax reform, I am saying we should be looking at all | |
| the entities? | |
| Mr. MORAN. Yes. | |
| Mr. RENACCI. One other question. Mr. Thomas, this is for | |
| you but others can answer. The Tax Code currently allows | |
| deduction for interest on mortgages up to $1.1 million. Do you | |
| think that is appropriate? What is an appropriate level? | |
| Mr. THOMAS. I think it is appropriate because of the area | |
| in which I live and work. So, obviously, I think it is | |
| appropriate. It is taken where it is needed. Across the country | |
| there aren't that many people that go all the way up to the | |
| maximum. But, again, in my particular area, $500,000 buys a | |
| starter home. If you were to reduce the limit down to $500,000 | |
| that is going to negatively affect most of the coastal areas of | |
| the country where the prices are much higher. So it would have | |
| a negative effect. | |
| Mr. DIETZ. In addition to high-cost areas, you could also | |
| have stocking issues. If you have multiple home ownership, for | |
| instance someone who is about to retire and they have one home | |
| where they work and one home where they plan to retire soon, | |
| two they own simultaneously, that limit is for both mortgages, | |
| both homes under Section 163. | |
| Mr. RENACCI. Mr. Chairman, I yield back. | |
| Chairman CAMP. Mr. Neal. | |
| Mr. NEAL. Thank you, Mr. Chairman. Just a quick comment | |
| based on previous experience in terms of dealing with Section | |
| 8s. It is the saturation point on Section 8s that begin to | |
| change neighborhoods, it is the concentration of Section 8s. I | |
| think that is one of the challenges, because as I pointed out | |
| to the other panel, there are few issues that are more complex | |
| in urban economics than housing. In the experiments we had in | |
| the 50s and 60s with many of our veterans coming back, it | |
| worked very well. And then as the housing grew much older and | |
| there was less money to keep it up to date, in old cities | |
| landlords began to walk away from properties. And one of the | |
| phenomena during those years was abandonment. For those of us | |
| who had to deal with that abandonment issue, it was very | |
| significant because we had great difficulty tracking down the | |
| landlord. And I think having the private sector involved in | |
| helping to discipline the aspects of the marketplace is | |
| terribly important. | |
| Mr. Moss, I am surprised that you mentioned the shortage of | |
| affordable housing. And it is always important I think to use | |
| the term ``affordable housing,'' because the connotation of | |
| low-income housing, again, is that you are going back to high- | |
| rise developments and that you are going back to a | |
| concentration of Sector 8s. But you mentioned that there is a | |
| shortage of affordable housing in your testimony. Would you | |
| speak to that issue, please? | |
| Mr. MOSS. Yes, the Harvard study that was most recently | |
| published, the report showed that only four eligible low-income | |
| households out of ten were finding an apartment that achieved | |
| affordability for them. Four out of ten. So there are six | |
| households out of ten that cannot find an apartment where their | |
| rental costs are 30 percent of their monthly income or less. | |
| They are paying 50 percent, 60 percent of their monthly income | |
| in rent. And so the rent burden is tremendous in this country. | |
| The Harvard report demonstrates that, sir, and also the | |
| recent Bipartisan Policy Housing Center report. | |
| Mr. MORAN. One of the confusing things--on affordability, | |
| we need to define it. Some people say affordability is 80 | |
| percent of the median income. And if you do 80 percent of the | |
| median income, like the apartment industry, 90 percent of the | |
| available housing is affordable. The low-income, where you can | |
| only afford to pay 50 or 60 percent or 40 percent of the median | |
| income, is where the real problem is. So it is the low-income | |
| which needs to be subsidized and needs to have the credits and | |
| needs to have the Section 8s if that gap that is currently | |
| there is going to be closed. | |
| Mr. NEAL. But I also think it is fair to say that | |
| management is a key issue. | |
| Mr. MORAN. Yes. | |
| Mr. NEAL. On how those units are managed. | |
| Mr. MORAN. Yes. | |
| Mr. NEAL. If you get some first-class management teams | |
| nobody would even know it is affordable housing or subsidized | |
| housing. And then if you get a bad management team that simply | |
| accepts the subsidy and walks away from the property when | |
| things start to go south for them on their other investments, | |
| and that is frequently what happens, they stop any sort of | |
| upkeep to the property. And I think we need to be mindful of | |
| that. | |
| How would you strengthen the low-income credit? I have been | |
| a supporter of new markets and low-income housing credits. I | |
| think it works. How would you propose strengthening the option? | |
| Go ahead. | |
| Mr. DIETZ. Your bill with Mr. Tiberi that---- | |
| Mr. NEAL. I was hoping you would say that. | |
| Chairman CAMP. I don't see a prompt here, do I? | |
| Mr. DIETZ. Without that the credit rate on the tax credit | |
| falls and it results in 18 percent less equity in the deal. So | |
| fixing that rate ensures that a sufficient amount of equity is | |
| available, because this is a production program. And we heard | |
| in the earlier panel, economists like vouchers in theory. But | |
| vouchers don't help build the property. They help allocate the | |
| demand after the fact. This program is really useful in the | |
| sense that it provides safe affordable housing on the | |
| production side. | |
| Mr. NEAL. Thank you, Mr. Chairman. | |
| Chairman CAMP. Thank you. I will go to Mr. Blumenauer and | |
| then we will close with Mr. Griffin. | |
| Mr. BLUMENAUER. Thank you very much. I appreciate the | |
| special emphasis that several of you have made in terms of the | |
| low-income tax credit. I think it is important to drive that | |
| home when there is so much in flux. I would just put three | |
| things on the table because you all represent groups that have | |
| certified smart people and it might be useful to get a little | |
| context and feedback from you. So I will put the three and then | |
| I will get out of your way. | |
| One, you may have heard comments that I made earlier about | |
| the impact of the Federal Tax Code subsidizing people who live | |
| in areas that are frequently prone to disaster, and in fact | |
| some of them are in areas that by Federal law were not supposed | |
| to provide infrastructure support from the Federal Government. | |
| Yet we are subsidizing, for example, on a second home and then | |
| after we pay Federal money to help clean things up, then they | |
| go right back and are able to qualify for a deduction. And I | |
| would appreciate it if, again, this might be something that | |
| some of your certified smart people might be able to help us | |
| with in terms of some feedback. | |
| The second deals with strengthening the provisions--I have | |
| long felt comfortable with the notion of having the capital | |
| gains exclusion for residential real estate, because nobody | |
| paid it except the dumb, the distressed, or the divorced. But | |
| there have been instances that have been described to me where | |
| people use the provisions under current law where it is two out | |
| of the five, but they use it to sort of serially flip, bouncing | |
| back and forth with a residential property and switching that | |
| advantageously to be able to serially harvest the capital gains | |
| exclusion. It is not something that is a long-term residence | |
| that they are a part of. If you have some thoughts, or if there | |
| is some smart person there that could give us a written | |
| response, it would be appreciated. | |
| The final question that is of interest to me is, today, the | |
| extent to which residential property represents people's | |
| retirement security. Notwithstanding the fact that a lot of | |
| folks are under water and they are up and down, but we are | |
| watching pensions disappear, we are watching 401(k)s become | |
| 201(k)s, we are watching a number of people tapping early | |
| retirement because of financial problems. They are retiring | |
| early with Social Security. They are taking things out of their | |
| 401(k)s, their IRAs. If you could help us identify the role you | |
| think residential property plays in retirement security going | |
| forward, it would be something that I would be very interested | |
| in. | |
| Mr. DIETZ. On the gain exclusion in 2008 in HERA, the | |
| Housing Economic Recovery Act, there was a change made in | |
| Section 121 to address that two of five provision. And it was a | |
| change that was supported by the industry at the time. It | |
| stipulates that you can't claim the gain exclusion for years in | |
| which you don't use the property as your primary residence. So | |
| someone who is using it for speculation or an independent | |
| landlord or owning it for a long period of time---- | |
| Mr. BLUMENAUER. My question is, is that tight enough to | |
| prevent people from intent to reside being able to game the | |
| system? | |
| Mr. DIETZ. And on the third issue that you raised, we have | |
| papers and research on the importance of housing wealth. It did | |
| take a big hit. Household net worths declined 40 percent. | |
| Polling surveyed consumer finances from 2000 to 2010. But | |
| recent price gains have begun to repair that, and, obviously, | |
| for those reasons the housing tax incentives will go in the | |
| opposite direction. | |
| Mr. BLUMENAUER. Thank you, Mr. Chairman. I would just | |
| welcome any of those little papers that you have in those | |
| areas. | |
| Mr. THOMAS. Sure. On the first question that you had I | |
| might comment that is really a local land use issue. Because if | |
| authorities are going to continue to allow building there, | |
| people are going to continue to build. That is where the | |
| problem lies. | |
| We, as realtors, supported phasing out subsidized flood | |
| insurance last year. So, you know, we understand. | |
| Mr. BLUMENAUER. But if we get rid of the tax deduction it | |
| would be recommended. Thank you, Mr. Chairman. | |
| Chairman CAMP. Mr. Griffin is recognized. | |
| Mr. GRIFFIN. Thank you, Mr. Chairman. Thank you all for | |
| being here today. And I know that you all share our general | |
| goal of simplifying the Code and having a pro-growth Tax Code. | |
| There are certainly provisions in it that I know you favor. But | |
| we can all agree that it is a mess. And we are trying to make | |
| it better. | |
| You have--I assume you heard some of the folks on the first | |
| panel give some of their ideas on what they would prefer to see | |
| instead of the mortgage interest deduction that we have. One of | |
| those proposed is some sort of credit. I would like to first | |
| hear from you four--whoever wants to speak--what your opinion | |
| is on the credit, and how it would impact what we consider | |
| middle-income Americans who rely on the mortgage interest | |
| deduction. | |
| Mr. DIETZ. The first problem with the credit is the rates. | |
| We saw a 15 percent rate proposed in 2005. A 12 percent rate | |
| proposed by recent commissions, including the Bowles-Simpson | |
| commission. That rate is so low compared to the marginal tax | |
| rates, which is still the comparable value, that it reports a | |
| significant tax hike for homeowners. | |
| So the question is who are the winners and who are the | |
| losers? There might be some winners, but we most definitely | |
| know who the losers would be moving to that kind of credit from | |
| the existing deduction. It would be young folks who have to use | |
| a mortgage to buy a home in high-cost areas. | |
| Mr. GRIFFIN. I think that it is fair to say and I think you | |
| would agree with this, that credits suggested or changes | |
| suggested also assumed that marginal tax rates are changed. And | |
| some of the analysis that I have seen or heard of the credits-- | |
| and we discussed this a little bit with the earlier panel-- | |
| assume that you have to have some sort of change in that | |
| marginal tax rate. | |
| Can you comment on it? Because clearly if you took the | |
| marginal tax rate down to a high of 25 percent, for example, | |
| clearly that is going to be favorable to people like me who | |
| count on the mortgage interest deduction, along with a lot of | |
| middle-income Americans. So how does that change in any way | |
| your analysis? | |
| Mr. DIETZ. Pro-growth tax policy that creates jobs, would | |
| raise wages and make the economy grow faster. That is good for | |
| housing. But, as you say, there are a lot of assumptions. And, | |
| for example, one of the assumptions with moving to a tax credit | |
| is what happens to the real estate property tax deduction? The | |
| proponents always focus on the MID to a tax credit, but they | |
| don't explain, well, we assume the property tax deduction is | |
| completely eliminated. That could also reduce the value for | |
| home buyers. | |
| Mr. GRIFFIN. Is there anyone else that wants to comment on | |
| that? Okay. I thank you all for being here. | |
| Quickly, I think I have another minute, there was a comment | |
| made on the previous panel that the mortgage interest deduction | |
| incentivizes debt as opposed to equity. Do you have any comment | |
| on that? | |
| Mr. DIETZ. My reaction when I hear that is, people don't | |
| take out debt to make money. You pay interest; it is a cost. | |
| Mortgage interest deduction offsets the cost of that debt. The | |
| question is who needs debt to buy homes? Well, it is | |
| particularly younger households and, in fact, our research has | |
| shown the primary beneficiaries of the mortgage interest | |
| deduction with shared household income, is younger households | |
| that need the mortgage to buy a home. If you get rid of it, | |
| prices are going to fall and who wins? Cash buyers, investor | |
| buyers. That is not good policy for a stable middle class. | |
| Mr. THOMAS. Yes, and I would also say that increasing the | |
| debt and the amount that you pay on that debt, you are not | |
| getting that entire amount back in a tax benefit so the law | |
| doesn't really encourage you to take on more debt. | |
| Mr. GRIFFIN. Well, I think we are all looking very | |
| carefully at this because we understand that whatever changes | |
| we make are going to have an impact, positive or negative, on a | |
| lot of Americans that count on this that are having a hard time | |
| making ends meet anyway. But we are focused on having a | |
| simpler, fairer Code that encourages economic growth which will | |
| benefit us all. | |
| Thank you all for being here today. It was really | |
| thoughtful and we appreciate it. | |
| Chairman CAMP. Thank you. We do have one more questioner, | |
| Mr. Young, and then we will conclude the hearing. | |
| Mr. YOUNG. Thank you, Mr. Chairman. It has really been a | |
| very informative hearing here. I thank all our panelists for | |
| appearing here today and for delivering your testimony. | |
| Earlier, we had a panel where we received testimony that a | |
| disproportionate share of the home mortgage deduction benefits | |
| go to taxpayers in the largest metropolitan areas. One witness | |
| testified that 20 percent of the tax benefit is claimed by | |
| taxpayers in California. | |
| First, do you have any reason to believe that that | |
| testimony was incorrect? And, if not, then do you have concerns | |
| about this? Concerns about the disparate benefits between | |
| geographic areas and between types of communities across our | |
| country as reflected in the Tax Code? | |
| Mr. DIETZ. You know, the mortgage interest deduction | |
| obviously is on a nominal dollar basis more valuable in high- | |
| cost areas. But, as I mentioned in our testimony, that is | |
| actually one of its merits in the sense that it is one of the | |
| elements, one of the few elements in the Tax Code that does | |
| account for differences in the cost of living. Property tax | |
| deduction is the same way. You want an incentive that | |
| encourages young home buyers to be able to buy in high-cost | |
| areas. Why are they high-cost? They are high-cost because they | |
| have dense concentrations of population. That is where things | |
| are growing. That is where wages are growing. And if you shut | |
| out those younger home buyers from those kinds of markets, that | |
| is going to have a distinct economic impact. | |
| Mr. THOMAS. And those areas are obviously very, very | |
| concentrated in numbers of households and so you are going to | |
| have a disproportionate share. The number of households in | |
| California is much higher than in most of the rest of the | |
| country anyway. So you are going to have that effect. Plus, | |
| just the sheer cost of building in those areas produces higher | |
| costs. | |
| Mr. YOUNG. If there is no other thoughts or perspectives on | |
| that, I thank you again and I yield back. | |
| Chairman CAMP. Is the 20 percent accurate? | |
| Mr. THOMAS. I don't know that it is. We would have to do | |
| research on that. That seems awfully high. | |
| Chairman CAMP. I want to thank this panel. You have been an | |
| excellent panel. And I appreciate your views and your | |
| perspectives and, obviously, as I have said, tax reform is a | |
| critical issue to this Committee and we remain committed to | |
| moving forward in an open and transparent manner. And your | |
| participation today is obviously a very important part of that | |
| process. | |
| I would ask that you promptly respond in writing to any | |
| areas where that was requested or would be appropriate, and as | |
| we prepare the formal hearing record we will make those written | |
| submissions a part of that. So, again, thank you very much for | |
| being here. The Committee stands adjourned. | |
| [Whereupon, at 1:05 p.m., the Committee was adjourned.] | |
| [all] | |
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