Taxing times

Residential market rises up against reforms

By Janine Anderson

The President’s Advisory Panel on Federal Tax Reform recently proposed a series of tax-code changes.

Many in the residential construction and real-estate markets wish it hadn’t.

“We believe the tax plan that was presented by the panel would be a bad plan for housing, home owners and the economy,” said Michael Strauss, spokesman for the National Association of Home Builders. “It would affect millions of households.”

Among the hardest hit, he said, would be the 18 million families that have bought their homes in the past few years.

“By and large, these are middle-class Americans counting on tax incentives to maintain a standard of living,” he said. “The plan would cause home values to fall and send a ripple effect throughout the economy.”

Some of the panel’s proposals strike directly at the tax benefits that help make home ownership possible. Money paid for property taxes and mortgage interest can be taken as an income-tax deduction, dropping many households into lower tax brackets.

But the panel’s recommendations include the elimination of state and local property tax deductions as well as mortgage deductions. Instead, according to the panel’s report, home owners would be given a tax credit equal to 15 percent of the interest paid on mortgages. The maximum mortgage amount to qualify for the credit would vary between $227,000 and $412,000.

The proposals arrived at a time of near record highs in home ownership in the United States. According to the U.S. Department of Commerce, home ownership stands at 69.1 percent of U.S. households in the first quarter of 2005.

The nation’s home owners have $10 trillion in equity in their homes, Strauss said. That equity is used to pay for retirement, to remodel homes, to pay for college educations.

If the deductions were reduced or eliminated, household wealth would decrease, he said.

“It would be a policy that would erode housing values and curtail home sales and reduce spending,” Strauss said. “It doesn’t make sense from our vantage point.”

Frank Madden, president of Brookfield-based M.D. Properties Inc. and president-elect of the Metropolitan Builders Association, said that as a home builder and home owner he opposes changes to the current system.

“I don’t want to see anything that does away with the tax advantage that exists now because that helps make housing affordable,” he said. “Shelter is one of the basic necessities.”

While he opposes changes to the real-estate tax structure, he does agree with the principle of tax reform.

“The complicated, extensive tax system we’ve got now needs work,” he said. “I would like to see the advantage that owning a home has maintained. ... Anything that would make housing more expensive at this point, I would be opposed to it.”

Craig Rakowski, president of Wauwatosa-based James Craig Builders Inc. and the 2005 president of the Metropolitan Builders Association, said he couldn’t believe the changes were even proposed; if they were to be approved, it would be even worse.

“To me, that would just be a travesty,” Rakowski said. “It would be changing the whole investment philosophy of the United States.

“I can’t imagine the impact that would have on the economy as a whole. Forget about home owners or home builders.”

He said people investing in their homes is a driving force of the economy, and these changes could spark an incredible turnover in homes, with people selling before the changes to get out of the real-estate market while there are still tax benefits to owning property.

“I’d hate to see them change the inherent principles people have been using to buy houses,” he said. “Since ’86, we’ve been operating under a certain principle, that interest is deductible. To me, that’s the one way the average person can keep up with inflation and make money on this stuff.”

Strauss said no one knows yet what will happen with the panel’s recommendations. Some say government officials might wait until after the 2006 elections to move forward with tax-code changes, but others are pushing to complete the tax-reform process.