William J. Polley

Nothing like 'simplicity'. Just think of the games that can be played with regional statistics, financing of second homes from the first ones, and changing all equity loans to mortgages. The second home deduction is for the benefit congresspeople, so this will never go away. Changes would affect not only income tax but property values as well. If so little changes, then why bother? If so much, then why change? The only thing worse than the income tax are changes to the income tax.

Quick question: Will existing homeowners be able to use their current home mortgage deductions according to these proposals?
How about property taxes ( 2.5% )?

I guess it's just unfortunate I was born in the 70s. Not only did I get to buy a home for my new family at the top of the current cycle but now they are going to change the rules of the game which will greatly affect the value of my home and deductions.

Liz Ann Sonders could possibly do more to hurt me financially with these recommendations then she ever has to help me grow wealth while keeping my money at Schwabb. I guess it's time to find another "Chief Investment Strategist".

I haven't read anything about existing homeowners being "grandfathered in." I think that would be problematic. Property taxes are local taxes, so the panel's recommendation is to eliminate that deduction.

Thanks for your answer. Am I reading this wrong about current homeowners and their deductions? From the article:

The commission also recommends ending tax breaks for second homes and home-equity loans. In its proposal, current homeowners would be able to keep their original mortgage-interest deductions, which would change only if the homeowners refinanced or purchased a new home.

While I never felt the mortgage tax breaks were fair, many people have based their buying decisions on these deductions. Not only will the value of my house fall but my after tax housing costs will rise by a disproportionate amout considering I am a new homeowner with a larger mortgage and higher property taxes than long time owners.

I'd like to see how many people on this panel actually have a mortgage or for that matter how many people in Congress have one. They will claim this is a tax on the weathly but the truly weathly don't have a mortgage. How about a federal sales tax? That would put too many accountants and tax lawyers out of work and would promote savings at the same time. Makes too much sense to do this.
Thanks for your response.

The way I read the article, especially the passage you cite, is that the sentence about current homeowners being able to keep their tax break was referring to the sentence directly before it, that is, that it applied only to 2nd homes and home equity loans. In the full report it does say that the cap on what is deductable would be phased in for existing homeowners, and I take that to be applying to the primary residence. Remember, on the primary residence, they are lowering the cap on what is allowable and changing it from a deduction to a 15% credit. Low income homeowners may potentially benefit. Most middle income homeowners will be largely unaffected. But once you get up in to the high end homes, the tax benefits would go away.

The panel looked at a national sales tax but decided against it. Details are in the report.

http://www.taxreformpanel.gov/final-report/

Thanks for your help in understanding this William. I just discovered your blog and have enjoyed it so far.

If they don't grandfather in current homeowners, those who have just bought are unfairly hurt the most. They lose the actual tax breaks that were used in calculating the present value of the home and their home is now worth less.

Any future buyer gets a break on the discounted present value of the house which would offset any lower tax breaks they receive.

Seems a bit unfair to us new homeowners.

What odds do you give of these new mortgage tax deduction proposals actually passing?

You ask good questions and raise good points. Personally, I'd be more comfortable with a 10 year phase-in for existing homeowners than the proposed 5 year phase-in. Most of the hit that you would take if you lost the interest deduction would come in the first 10 years of a 30 year mortgage. (In the first 10 years you'd pay almost half of the total interest you will pay, and what's left is heavily discounted.) A 10 year phase in shouldn't affect housing values that much at all and would allow recent homebuyers to capture most of the savings they bargained for.

This is a tough race to handicap. The real estate and mortgage lobby is formidable. There's going to be a lot of resistance. And yet, there are very strong economic arguments in favor of removing the deduction. Like many reform ideas, it's probably a long shot the first time around, but eventually it just might happen.

Thanks for your comments!

Limiting housing subsidies is a good idea (and I'm in California!)

In an ideal world, no one would have to pay taxes. But given the need for taxes, and to do it in the fairest and the most economically efficient manner possible, the proposal to limit mortgage deductions is a very good and timely one.

The current housing subsidies:

1) Encourage and reward those taking on the largest possible amounts of mortgage and home-equity debt, as early as possible.

2) Discourage saving in general, and saving for a home purchase in particular because the savings are at a heavy tax disadvantage. The savings also lose purchasing power rapidly because the home prices are inflated by cheap and tax-advantaged credit.

3) Contrary to popular belief, make housing less affordable by inflating home prices excessively.
The proper way to make housing affordable is not by pumping cheap credit into the system while endlessly inflating prices, but by keeping house prices low and increasing supply. This will also reward those that save more while making it easier for everyone to pay off the principal (what an alien concept!?) instead of encouraging overconsumption and outsized debts.

4) Distort the economy by channeling capital away from more productive investments.

These effects are very clearly seen today in abysmal personal savings rates, and a housing bubble that is pushing people into taking larger and riskier loans.

Over the long run, limiting these housing subsidies will have a very positive effect because saving and investment will be increased, housing will be cheaper, and the economy will become more efficient and productive.

In the short run of course, there will be huge resistance to these proposals from those who stand to lose the most. Home owners have seen huge un-earned increases in their wealth in the recent past. These increases are largely a transfer of wealth from current and future homebuyers, and other taxpayers. The prospect of these unexpected wealth gains slowing down or reversing is not a compelling reason to avoid implementing a better and more equitable tax code.

Also, most opinions in the media seem to assume that rising home prices are a "good thing" to be cheered, while advocating reduced home prices is somehow completely unacceptable and almost sacrilegious. The past several years have seen enormous inflation in home prices with little income or job growth, primarily fueled by explosion of credit, tax subsidies and speculation. After 100% or more increase in home prices, if the prices are scaled back 20 or 30%, is it not something that should be welcomed? Are unlimited wealth gains for every homeowner and real-estate speculator part of a social contract that needs to be underwritten by future homebuyers, savers and other taxpayers?

Transitions can be tricky and specific measures might be looked into to ease the pain, but there is nothing more important for long run US economic health than to encourage saving and investment. These changes to the tax code are a step in the right direction.