President Trump’s draft tax proposal is a clear improvement over the status quo, but it falls short of the type of overhaul we really need. It’s a long way from fruition and as I noted in a previous post, the greatest opposition to even moderate change in the tax code will come from the special interests.
Everyone in the housing industry, from contractors to roofers to realtors, benefits from the mortgage interest deduction in the current tax code. By passing along part of the cost of your new home to other taxpayers, this provision subsidizes an entire industry and artificially increases home values, all in the name of “making housing affordable” and pursuing the “American dream.” President Trump’s draft proposal did not eliminate this deduction, but it increases the standard deduction. You must itemize to deduct mortgage interest, so increasing the standard deduction means that homeowners with modest home payments would not enjoy the same tax benefit as they did previously, thereby reducing the net effect of the mortgage interest deduction, at least on paper.
The National Association of Realtors wasted no time in its response. NAR president William Brown referred to the proposal as a “nonstarter,” noting:
For over a century, America has committed itself to homeownership with targeted tax incentives that help lower- and middle-class families purchase what is likely their largest asset. No surprise, real estate now accounts for over 19 percent of America’s gross domestic product, or more than $3 trillion in investment. But for roughly 75 million homeowners across the country, their home is more than just a number. It represents their ambitions, their nest egg, and the place where memories are made with family and friends. Targeted tax incentives are in place to help people get there. The mortgage interest deduction and the state and local tax deduction make homeownership more affordable.
Brown is protecting industry’s his turf by wrapping the mortgage interest subsidy in the American flag. His defense of the current system cites America’s alleged commitment to home ownership with an emotional appeal—homes are about ambitions and memories. Of course, one need not own a piece of real estate to amass great memories, and the “targeted tax incentives” about which he speaks penalizes renters.
It’s ironic that the President is getting stiff opposition while proposing to retain the subsidy. Increasing the standard deduction might reduce the number of Americans who itemize their taxes, but the accompanying tax cuts would likely spur demand for housing anyway. That’s just not good enough for the industry, which like most, will lobby for government support at every turn. The NAR has tons of resources to trumpet this argument. When traditional media outlets opposing anything and everything Trump offers, it’s not clear who will fight the realtors and other special interests. Achieving even modest tax reform won’t be easy.