Homeowners' tax benefits facing cuts?

For a commission meeting since February, they have been awful quiet!

By Kenneth R. Harney
Boston Herald
10/24/10

Could a report due Dec. 1 from a bipartisan presidential deficit-reduction commission lead to fundamental changes in the way the federal tax system treats home ownership?

For decades, the political rule in Washington has been that nobody messes with homeowners’ tax benefits - mortgage-interest deductions, capital-gains exclusions and property-tax write-offs.

That’s true even though these breaks cost the U.S. government hundreds of billions of dollars in tax revenues a year and increase the federal deficit. But now the sheer size of the country’s fiscal problems - a $1.3 trillion deficit for 2010 and a fast-mounting $13.6 trillion debt overall - could be slowly altering the equation.

Not only are some Republicans and Democrats joining in support of plans to lower the deficit through across-the-board cuts in defense spending, social programs and tax subsidies, but even leaders in the real estate industry are speaking up.

All five panelists at the opening session of the Urban Land Institute’s annual meeting this month agreed - Democrat and Republican alike - that while continuing tax-system support for housing is important, the current mix of tax incentives is costly and imbalanced. They admitted that it disproportionally favors home ownership over renting.

One panelist, former U.S. Housing and Urban Development (HUD) Secretary Henry Cisneros, privately added afterward that leaders on both sides of the political aisle increasingly believe deficits could wreck the economy within the decade.

“This is a catastrophe looming,” Cisneros said. He noted that Congressional Budget Office (CBO) estimates that public debt will hit 69 percent of gross domestic product by 2020, hobbling the country with $778 billion in annual interest payments alone.

Since leaving office, Cisneros has been in the housing development industry and is currently executive chairman of realty investment company CityView.

Though long an ardent proponent of home ownership, he now believes the real estate and housing industries must be willing to contribute their fair share to any “comprehensive long-term plan” to balance the budget.

J. Ronald Terwilliger, former CEO of giant developer Trammell Crow Residential and a contributor to some Republican campaigns, agreed that federal tax incentives for ownership should be throttled back - “a phased-in reduction” over a period of years so as not to worsen an already-strained housing market.

Steve Preston, who headed HUD toward the end of President George W. Bush’s term, suggested a “comprehensive policy” for deficit reduction, covering all economic sectors of the economy. He said that stands the best chance of gaining the broad political support needed to push serious deficit-reduction measures through a fractious Congress.

In theory at least, that’s what the National Commission on Fiscal Responsibility and Reform is supposed to deliver to President Obama six weeks from now.

The 18-member commission - co-chaired by former Republican Sen. Alan Simpson of Wyoming and former Clinton White House Chief of Staff Erskine Bowles - has been holding hearings and gathering deficit-reduction ideas since February.

Most commissioners are current members of Congress, but the group also includes representatives of private industry and labor.

Though the commission has provided no public hints of where it’s headed, analysts say it’s inevitable that the panel will propose cutbacks to tax subsidies for real estate.

Likely Targets:

• The mortgage-interest deduction, which added about $100 billion to the deficit in fiscal 2010 and more than $400 billion during the last five years
• Capital-gains exclusions for home-sale profits, which cost more than $128 billion between fiscal 2006 and 2010
• Property tax write-offs, which cost $70 billion-plus during the same period