According to the National Association of Home Builders (NAHB), oversimplifying the tax code and reducing financial incentives for housing could hurt the American middle class and widen the gap between the super-rich and everyone else. Such was the testimony presented to the U.S. Congress by economist Robert Dietz on behalf of the NAHB.
The NAHB is a powerful industry group that has seen better days. Although home builders have been darlings of Wall Street over the last few months, their financials are a far cry from their rosier days prior to 2007. Real estate analysts expect that home builders will alleviate the inventory shortages across various housing markets, but the builders have thus far been cautious and slow to react.
Although it is clear that the NAHB's appeal to the House Ways and Means Committee is self-serving, the points presented by Robert Dietz have a lot of value. Dietz reminded committee members about the 1986 Tax Reform Act and its efforts to oversimplify the U.S. Tax Code. That legislative reform ended up restricting construction of multifamily residences since there was no financial incentive to do so at the time.
Dietz mentioned three specific housing incentives that could go away if the U.S. Tax Code undergoes major reform that favors simplification:
- Low Income Housing Tax Credit (LIHTC)
- Mortgage Interest Tax Deduction
- Real Estate Tax Dedcutions
Affordable housing might not be a major issue now, but the improving conditions of the housing market and high demand for rental properties will likely put pressure on affordable prices soon. Dietz called on Congress to keep the LIHTC afloat since it is virtually the only tool available for investment in affordable housing.
On the issue of mortgage interest tax deductions, Dietz argued that up to 70 percent of homeowners claimed this deduction in 2009. He added that this deduction stimulates the real estate economy by prompting homeowners to look for bigger homes as the size of their families increases.
On the issue of other real estate tax deductions, Dietz explained that repealing deductions for second and vacation homes would have a negative effect not only on the housing market but also on the local economies where these investment properties are located. Dietz finished his testimony with a topic that is often touched on by economists and financial analysts: The correlation between residential construction, employment and the overall consumer economy.