Congress Considering Reducing Housing's Tax Advantages

I woke up this morning and found this eye-opening email alert in my inbox; apparently Congress is looking into revamping the tax advantages presently enjoyed by mortgages. This is intended to remove the tax incentive of owning a house. This would destroy the current housing bubble if passed and just the rumor of it might be enough. On the one hand I think that there is no way this will ever pass as our politicians are too spineless. On the other hand, all districts would lose so maybe, since everyone is in the same boat, it could pass. Then there is the fact that the US is basically broke and needs to find new revenue streams and as always that comes from the peoples' pockets.

I was also struck by this comment: "I believe the tax catalyst has been essential and in fact we would not have had the housing boom of the last five years without the [tax code] changes in 1997.'' So they are now admitting that this housing bubble has not been driven by a housing shortage, by increasing fundamental value, etc.?

Some choice quotes:

"The status of housing as the least- taxed investment in the U.S., which has helped fuel an eight-year boom in real estate values, may be in jeopardy as a presidential commission considers changes to the federal tax code."

The panel...is studying options to lower taxes on many types of investments to meet Bush's goal of spurring savings and economic growth. Changes to housing-related tax incentives will also be considered, Jeffrey Kupfer, the panel's staff director, said in an interview."

"Economists say such policies would have the effect of eroding the relative advantage housing has enjoyed over other investments since 1997, when Congress effectively made most sales of primary residences tax-free."

""One of the pillars of strength of the housing market is the fact of the tax-advantaged nature of the asset,'' says Anthony Chan, a senior economist at JPMorgan Asset Management in Columbus, Ohio. "To the extent that you chip away at that, you would see housing somewhat negatively impacted.''"

"The 1997 changes [to the tax code whereby Congress allowed homeowners to exclude up to $500,000 in gains when they sell homes they occupy] "just released this tsunami of resources and wealth in the housing market,'' says Brian Wesbury, a former chief of staff for the congressional Joint Economic Committee and now chief investment strategist at Claymore Advisors LLC in Lisle, Illinois. "I believe the tax catalyst has been essential and in fact we would not have had the housing boom of the last five years without the changes in 1997,'' Wesbury said in an interview."

"In contrast, income from other forms of investment is taxed at higher rates, creating the relative advantage for housing. Investment interest is taxed at rates as high as 35 percent; the rate on dividends was the same until it was reduced in 2003 to 15 percent."

"It is this relative advantage for housing that may be called into question by the tax commission. Members have said at hearings that they are considering a wide range of ways to stimulate savings. The options range from cutting rates on dividends, interest and capital gains to streamlining current tax-free savings mechanisms for retirement, education and health care -- or even junking the income tax in favor of a system that taxes only consumption."

"The toughest issue to tackle may be the mortgage-interest deduction, which has long been viewed as politically sacred, former Treasury Secretary James Baker III told the panel in March. "This is a political exercise every bit as much as it is an economic exercise,'' he said."

"The panel may also consider a recommendation by the congressional Joint Committee on Taxation to repeal the deduction for interest on home equity loans, Goold says. The panel's recommendations may include reducing the $1 million cap on which mortgages qualify for tax incentives, she says."