As Congress looks for ways to reduce the deficit, the National Association of Home Builders (NAHB) called on Congress to maintain its support for vital housing tax incentives, including the Low Income Housing Tax Credit, the mortgage interest deduction and real estate tax deductions as the nation's demand for housing increases.
"Home building is an industry dominated by small businesses, so the idea of simplifying the complicated tax rules related to business has great appeal. At the same time, our industry remembers painful lessons from the 1986 Tax Reform Act, when the commercial and multifamily sectors experienced a downturn due to unintended consequences," said Robert Dietz, an economist and assistant vice president for NAHB, in testimony during a House Ways and Means Committee hearing on tax reform and residential real estate. Dietz added that the housing industry spurs job and economic growth.
More than 40 percent of renters are "rent burdened," or pay more than 30 percent of their household income on rent, according to U.S. census data, and the Low Income Housing Tax Credit (LIHTC) is the most effective tool for the creation of affordable rental housing, the NAHB argued. Since its inception in 1986, the tax credit, which rewards private builders for constructing affordable housing, has financed more than 2 million affordable rental units.
"As LIHTC properties must generally remain affordable for 30 years, they provide long-term rent stability for low-income households around the country," Dietz said. "But the demand for affordable housing far exceeds the availability of financing through the LIHTC program. The solution is not to eliminate the most successful affordable housing program in the country, but to provide it with the resources necessary to address the shortage of affordable housing options in our cities and towns."
When it comes to housing and tax reform, the spotlight typically falls on the mortgage interest deduction, and Dietz set the record straight on a number of false assumptions regarding this important homeownership benefit.
"First, we frequently hear that few homeowners benefit from the mortgage interest deduction because itemization is required," he said. "In fact, most homeowners will claim it. In 2009, 35 million taxpayers, or 70 percent of homeowners with a mortgage, claimed the mortgage deduction in that year. Among all homeowners who have ever held a mortgage, the vast majority have claimed the home mortgage deduction for years at a time."
Critics say that the mortgage interest deduction encourages buyers to purchase a larger home, but the NAHB points out that homeowners with larger families need bigger homes and will therefore have a higher mortgage interest deduction.
Dietz also noted that the cost of housing varies greatly across the nation, so what appears to be a large deduction for a given home in one area may reflect a modest home in a high-cost area.
Moreover, the mortgage interest and real estate tax deductions are two of the few elements in the tax code that account for differences in cost-of-living.
"The real estate tax deduction is an important reminder that home owners pay more than $300 billion in property taxes each year. This fact is often ignored in the federal tax debates because these taxes are collected by state and local governments," said Dietz.
