Harney: Trump tax plan likely to affect housing

There’s no mention here of limits on mortgage interest deductions, so from strictly a home owner or buyer perspective, nothing jumps out as objectionable. Simplicity is good. In fact, the original Trump tax plan exempted the mortgage interest and charitable deductions from the modest limitations contained in Hillary Clinton’s proposal.

But here’s a key question: With a substantially increased standard deduction of $30,000 or $15,000, how many homeowners will want to file for mortgage interest or property tax write-offs, as they do today? I asked the chief economist of the National Association of Home Builders, Robert Dietz, and he estimates that the number of itemizers might drop from the current 25 percent of taxpayers to anywhere from just 5 to 10 percent.

Is that a problem? It depends on how you view the long-time tax code preferences for encouraging ownership of homes over renting. One analysis, provided by Evan M. Liddiard, senior federal tax policy representative for the National Association of Realtors, maintains that if you raise the standard deduction dramatically, “itemized deductions become less relevant” and previously valuable and distinctive “tax incentives [for] home ownership evaporate even while taxes are not necessarily being reduced.” There’s less incentive to own, rather than rent.

Dietz puts it this way: When you decrease the attractiveness of a long-time subsidy devoted to encouraging purchases by lowering financing costs, “the economics would reduce the tax benefit for home ownership.” Such a change could “increase the after-tax cost of paying the mortgage,” he says.

Tax reformers see the issue starkly differently. Most comprehensive proposals that have been made in recent years, notably the landmark, bipartisan Simpson-Bowles National Commission on Fiscal Responsibility and Reform, call for wholesale elimination or sharp reductions of special interest carve-outs in the tax code.

But could limiting or ending homeownership tax preferences have the side effect of lowering home values and selling prices? Academic researchers suggest the answer is yes. A new paper from an economist at the Federal Reserve estimates that eliminating the mortgage interest deduction alone would cause the average household to lose “10.9 percent of the value of the house, with homeowners losing 11.5 percent and home buyers 8.5 percent.”

The Fed study did not address the type of tax plan contemplated by Trump or Capitol Hill reformers, but appears to agree with the broad conclusion of earlier researchers: When you diminish the value of a subsidy on an asset, the value of that asset is likely to drop.

None of this is happening yet. Months of committee hearings and debate — and lobbying — are guaranteed before any tax plan gets to the president’s desk. But you should at least know what’s on the line for real estate.

Kenneth R. Harney of the Washington Post Writers Group is a past member of the Federal Reserve Board’s Consumer Advisory Council and is currently on the board of directors of the National Association of Real Estate Editors. Reach him at KenHarney@earthlink.net.