Could President Trump have unanticipated impacts on the federal tax code’s benefits favoring owing a home over renting one?
To the extent that the House, Senate and White House soon will be under one party’s control, the answer may well be yes. Although housing issues got scant attention during the campaign, Trump’s tax-change plans, linked up with ideas already proposed on Capitol Hill, could contain some jolts for many people.
Late in the campaign, Trump revised his plans in ways that make it more compatible with House Republicans’ tax “blueprint” issued in June. Trump would collapse the current seven tax brackets for individuals to just three: For married joint filers with incomes less than $75,000, the federal marginal tax rate would be 12 percent. For those with incomes of $75,000 but less than $225,000, the rate would be 25 percent. From $225,000 up, the rate for married joint filers would be 33 percent. Single-filer rates would have the same brackets but be based on incomes half the amounts for married joint filers. The capital-gains rate would remain capped at 20 percent, and the controversial 3.8 percent “Obamacare” surtax on certain investment income would disappear.
Now it gets more intriguing: To simplify the tax system and wean more taxpayers from itemizing deductions on Schedule A of their returns, the Trump plan would boost the standard deduction for joint filers to $30,000 (up from the current $12,600) and raise it to $15,000 for single filers, instead of $6,300 at present. For people with very high income, there would be a limit on all itemized deductions of $200,000 for married joint filers and $100,000 for singles.
There’s no mention here of limits on mortgage-interest deductions, so strictly from the perspective of a homeowner or buyer, nothing jumps out as objectionable. Simplicity is good. In fact, the original Trump tax plan exempted the mortgage-interest and charitable deductions from the sorts of modest limitations contained in Hillary Clinton’s proposal.
But here’s a key question: With a substantially increased standard deduction ($30,000 for joint filers and $15,000 for single files), how many homeowners would want to file for mortgage-interest or property-tax write-offs, as they do today? I asked the chief economist of the National Association of Home Builders, Robert Dietz, and he estimates that the number of itemizers might drop from the current 25 percent of taxpayers to 10 percent or even just 5 percent.
Is that a problem? It depends on how you view the longtime tax-code preferences for encouraging ownership of homes over renting. One analysis, provided by Evan M. Liddiard, senior federal tax policy representative for the National Association of Realtors, maintains that if you raise the standard deduction dramatically, “itemized deductions become less relevant” and previously valuable and distinctive “tax incentives [for] home ownership evaporate even while taxes are not necessarily being reduced.” There’s less incentive to own rather than rent.
Dietz puts it this way: When you decrease the attractiveness of a longtime subsidy devoted to encouraging purchases by lowering financing costs, “the economics would reduce the tax benefit for home ownership.” Such a change could “increase the after-tax cost of paying the mortgage,” he says.
Others see the issue much differently. Most comprehensive proposals that have been made in recent years, notably the landmark, bipartisan Simpson-Bowles National Commission on Fiscal Responsibility and Reform, call for wholesale elimination or sharp reductions of special-interest carve-outs in the tax code.
But could limiting or ending tax preferences for homeownership have the side effect of lowering home values and selling prices? Academic researchers suggest the answer is yes. A new paper from an economist at the Federal Reserve estimates that eliminating the mortgage-interest deduction would cause the average household to lose “10.9 percent of the value of the house, with home owners losing 11.5 percent and home buyers 8.5 percent.”
The Fed study did not address the type of tax plan contemplated by Trump or Capitol Hill Republicans, but it appears to agree with the broad conclusion of earlier researchers: When you diminish the value of a subsidy benefit from a favored asset category, the value of that asset to potential buyers or owners is likely to drop.
None of this is happening yet. Months of committee hearings and debate – and lobbying – are guaranteed before any tax plan gets to the president’s desk. But you should at least know what’s on the line for real estate.