On February 26, House Ways and Means Chairman Dave Camp (R-MI) released long-awaited draft legislation on tax reform, citing the need for "concrete solutions and ... real policies that strengthen the economy and help hardworking taxpayers". Low income housing advocates have been closely lobbying and monitoring Camp's committee for months to ensure that (1) the housing tax credits are preserved and that (2) the mortgage interest deduction is reformed, as both of these tools are critical to helping hardworking taxpayers at the lower end of the income spectrum. The released draft, which is unlikely to be introduced in the House this year but has value as a starting place for future tax reform committee work, begins the work of addressing both of these issues.
Low Income Housing Tax Credit
The good news is that Camp's draft preserves the most fundamental tax credit - the "9%" credit - which would continue competitive funding of the most worthy projects in each state. Yet the tax reform appears to be particularly detrimental to the preservation of affordable housing, as it eliminates the two main tools used in preservation: the 4% tax credit and tax-exempt private activity bonds. Additionally, the draft legislation extends the 9% credit period from 10 to 15 years.
The housing tax credit is the most effective tool we have for constructing and preserving affordable rental housing, and acts as an economic development tool as well, as the affordable housing projects have a ripple effect in their surrounding neighborhoods for rehabilitation and development. Read the full response statement from the Affordable Rental Housing A.C.T.I.O.N. Campaign, a national coalition that has been working to protect and strengthen the Low Income Housing Tax Credit.
Mortgage Interest Deduction
Camp's draft takes on reform of the mortgage interest deduction by lowering the cap on the size of mortgage for which interest can be deducted from $1 million to $500,000. This is an excellent first step, as capping the deduction is widely agreed upon to be necessary for progressive reform. This change is estimated to affect only 4% of US taypayers, exclusively those at the highest end of the income spectrum. Bipartisan studies have concluded that lowering the cap is essential to focusing the homeownership incentive on those who may need it, as the current deduction is providing a tax benefit to taypayers who would have become homeowners regardless1.
However, MHP, along with over 1,500 other organizations across the U.S. organized by the National Low Income Housing Coalition as the United for Homes Campaign, supports further reforming it by converting the tax deduction to a tax credit. This
would extend the benefit to a significant amount of homeowners who do not earn enough to benefit from itemizing their taxes. (Contrary to perception, 52% of all homeowners nationally do not claim the deduction). Numerous researchers have also concluded that converting the deduction to a credit is a fair, viable alternative2. Further, United for Homes advocates reinvesting the $200 billion per year (estimated savings, based on a 15% credit on mortgage interest paid compared to the current cost of the mortgage interest deduction), into the National Housing Trust Fund. This will provide a desperately needed new source of funding for the construction and preservation of affordable housing. Representative Keith Ellison introduced H.R. 1213, The Common Sense Housing Investment Act, to achieve these goals, along with providing additional funding for the Public Housing Capital Fund and the Low Income Housing Tax Credits.
To sign on your organization to endorse the Affordable Rental Housing A.C.T.I.O.N. Campaign to preserve the Housing Tax Credits, click here.
To sign on your organization to endorse the United for Homes Campaign to fund the National Housing Trust Fund with proceeds from converting the mortgage interest deduction to a credit, click here.
1 Congressional Research Service R43385, 2014; Congressional Research Service R43079, 2013; Congressional Budget Office, 2009
2 American Enterprise Institute, 2013; National Commission on Fiscal Responsibility and Reform, 2010; Bipartisan Policy Center, 2010; Congressional Budget Office, 2009;The President's Advisory Panel on Federal Tax Reform, 2005