Don’t worry about proposal to drop interest deduction

(Flickr photo by JD Hancock)

A caller last week was worried about the investment condo he had purchased this year.

His concern centered on the a particular item in the draft plan floated by Erskine Bowles and Alan Simpson, co-chairs of President Obama’s fiscal commission.  After this post was published early today, they coincidentally released their 59-page report.

Their recommendations for deficit reduction must be approved by 14 of the panel’s 18 members, accepted by the administration, and passed by the Senate and House to be implemented.  I don’t hear many of those members embracing that sodden turkey.  (Sorry, but I’m still digesting.)

The item that had my caller concerned was elimination of the tax deduction for mortgage interest, which could lower the deficit by an estimated $131 billion a year.

So sacred a cow is the deduction, which more than 35 million Americans claim, that few policy wonks say Congress would even entertain the idea of dropping or trimming it.  Among others, outgoing Speaker Nancy Pelosi has condemned the notion.

Although this liberal blogger has questioned the relatively modern idea that home ownership is fundamental to the American dream, I also recognize that our economic recovery depends in large part on more of us purchasing real estate.  In that way, not only can the home building industry create jobs, but demand for associated goods will climb–whether lumber, furnishings or housewarming supplies.

At the same time, who among the unemployed is going to buy a home? It is a vicious circle.

If it were possible to put aside the profound economic issues, as I have contended in the past, I find groundless the philosophical basis for the mortgage interest-rate tax deduction–the unquestioned assumption that all of us should have the opportunity to own a home.

Quoted in the New York Times, Calvin Johnson, a tax professor at the University of Texas, said that only those in the top third of wage earners even itemized their deductions, meaning that two-thirds of taxpayers weren’t eligible for the break.  According to him:

No one can make a serious intellectual argument in favor of the mortgage interest deduction. Why should the government subsidize homeowners rather than renters? The only thing it’s good for is middle-class votes.

Since the deduction reduces the after-tax cost of home ownership, taking it away would push down home prices.  Wouldn’t that spur home ownership in the end? Maybe, maybe not.

In the short run, it would do little either to motivate home builders or, therefore, jolt the economy.  Prices in the nation already are, and projected to be, lower than they have been in years.  Until employment picks up and consumer confidence swells, housing recovery has a long way to go.

(Flickr photo by Carol Von Canon)

We’ve already seen how the homebuyer tax credit boosted sales last spring, but activity remained below its earlier peak and persists at unhealthy levels today. There is a ton of distressed inventory out there, and it is not being absorbed fast enough.  In addition, supply that has yet to hit the market is a cloud just waiting to burst when sellers eventually sense an opportunity to take advantage of an improved market.

Lower prices haven’t been the answer to date, and pushing down prices by getting rid of the tax deduction can only increase unwanted supply.  Demand hinges on a combination of buyer willingness and ability to purchase property in meaningful amounts at any price.

I just don’t detect evidence that the American public is, by and large, yet ready to buy real estate.

Thus, retaining the tax deduction, at least for the time being, is the only rational course to take.

Much legislation, of course, ends up being irrational.

Whether the Bowles-Simpson commission ultimately demonstrates its rationality and the Congress follows suit is a bet I would not take.  No matter what is enacted of the commission’s recommendations, I am confident one turkey that just won’t fly is the tax deduction.  It will be with us for a long, long, long time.

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Malcolm Carter
Licensed Associate Real Estate Broker
Senior Vice President
Charles Rutenberg Realty
127 E. 56th Street
New York, NY 10022

M: 347-886-0248
F: 347-438-3201

Malcolm@ServiceYouCanTrust.com
Web site

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