Despite Keeping Mortgage Interest Deduction, Trump’s Tax Reform Plan Would Hurt Real Estate
John Jordan | April 2017
WASHINGTON—As promised the Trump Administration unveiled a tax reform plan on Wednesday (April 26) that at first blush has some benefits and some drawbacks for the real estate industry.
While representatives of the residential sector are pleased that the Trump economic plan does not tamper with the Mortgage Interest Deduction, the National Association of Realtors and the National Association of Home Builders were critical of other components of the proposal that they say would undermine the basic advantages of home ownership.
National Association of Realtors President William Brown noted that while major reforms are needed to lower tax rates and simplify the tax code, the Trump plan, while well intentioned, is a non-starter for homeowners and real estate professionals. Brown, founder of Investment Properties of Alamo, CA, said that Trump’s proposal to double the standard deduction and eliminate the state and local property tax deductions would effectively nullify the current tax benefits of owning a home for the vast majority of tax filers.
Brown in a prepared statement said that the plan puts at risk the investment of approximately 75 million homeowners across the country and would put barriers in place for prospective homebuyers and investors. He specifically cited the repeal of the state and local tax deductions in his criticism of the Trump proposal.
“Those tax incentives are at risk in the tax plan released today. Current homeowners could very well see their home’s value plummet and their equity evaporate if tax reform nullifies or eliminates the tax incentives they depend upon, while prospective homebuyers will see that dream pushed further out of reach. As it stands, homeowners already pay between 80% and 90% of U.S. federal income tax. Without tax incentives for homeownership, those numbers could rise even further. And while we appreciate the Administration’s stated commitment to protecting homeownership, this plan does anything but.”
NAR’s Brown added, “Realtors support tax reform, and it’s encouraging to see leaders in Washington doing their part to get there. We believe tax rates should come down to the degree that sound fiscal policy allows, and simplifying the tax code will help ensure fairness and transparency for individual taxpayers. It’s a goal we share with the authors of this tax plan, but getting there by eliminating the incentives for homeownership is the wrong approach. We look forward to working with leaders in Congress and the Administration to reform the tax code, while preserving America’s long-held commitment to homeownership.”
Granger MacDonald, chairman of the National Association of Home Builders, commended President Trump for taking on tax reform and keeping the Mortgage Interest Deduction as one of two individual deductions. However, the Kerrville, TX-based homebuilder said that doubling the standard deduction could severely marginalize the Mortgage Interest Deduction, which would reduce housing demand and lead to lower home values.
“On the corporate side, NAHB strongly supports the provision to lower the tax rate to 15% for pass-through entities. This would provide much-needed tax relief for America’s small businesses, which generate the lion’s share of job and economic growth,” he said. “Policymakers also need to take steps to ensure that lower corporate rates do not diminish the effectiveness of the Low Income Housing Tax Credit program, particularly given that the nation is experiencing an acute shortage of affordable housing.”
Like NAR, the NAHB chairman stated that the association would work with the White House and Congress to “craft meaningful tax reform that lowers rates for small business and hard-working families while acknowledging the special role that housing plays to foster economic growth.”
Some of the Key Elements of the Trump Proposal Are:
• Reducing the current seven tax brackets (10%, 15%, 25%, 28%, 33%, 35%, 39.6%) to three: 10%, 25% and 35%.
• Doubling the standard deduction. The White House explains this would allow a married couple to have a 0% tax rate on the first $24,000 they earn. The current standard deduction is $6,300 for single filers and $12,600 for married couples.
• Repeal the Alternative Minimum Tax (AMT).
• Return the top tax rate on capital gains and dividends to no higher than 20% by repealing the 3.8% Obamacare tax. The current maximum capital gains tax is 28%.
• Repeal the Estate or Death Tax, which taxes estate property that is valued at more than $5.4 million.
• Reduce the corporate tax rate from the top rate of 39% to a maximum of 15%.
• Most tax deductions would be eliminated with the exception of home ownership (Mortgage Interest Deduction), charitable giving and retirement savings, which would be protected under the Trump plan. State and local tax deductions would be targeted for elimination.
“This is not going to be easy. Doing big things never is. But one thing is for certain: I would not bet against this President. He will get this done for the American people,” said Gary Cohn, chief economic advisor to President Donald J. Trump and Director of the National Economic Council.
Some of the criticism of the plan emanates from the lack of specifics and particularly how the Trump Administration intends to pay for the plan or in other words not have the tax cuts and reform measures increase the federal deficit.
Maya MacGuineas, president of the Committee for a Responsible Federal Budget, said the U.S. tax code is in desperate need of reform to make it fairer and grow the economy. However, she noted in a prepared statement that “we have to recognize the simple facts that tax cuts are not the same as reforms, nor do tax cuts pay for themselves.”
“We share the President’s desire to enact pro-growth tax reform and encourage him to work with Congress to reduce rates and deficits. We are encouraged the White House is talking about eliminating some tax breaks; now the tough choices have to be made on how to broaden the base and pay for tax reform,” MacGuineas said. “Unfortunately, it seems the administration is using economic growth like magic beans—the cheap solution to all our problems. But there is no golden goose at the top of the tax cut beanstalk, just mountains of debt.”
The non-partisan Committee for a Responsible Federal Budget estimated that the Trump plan could cost $3 trillion to $7 trillion over the next 10 years.
House Speaker Paul Ryan (R-WI), Senate Majority Leader Mitch McConnell (R-KY), House Ways & Means Committee Chairman Kevin Brady (R-TX), and Senate Finance Committee Chairman Orrin Hatch (R-UT) issued the following joint statement on the Trump tax reform plan: “The principles outlined by the Trump Administration today will serve as critical guideposts for Congress and the Administration as we work together to overhaul the American tax system and ensure middle-class families and job creators are better positioned for the 21st century economy. Lower rates for individuals and families will allow them to keep more of their hard-earned money and empower them to invest more in their future.”
They added, “Getting tax rates down for American companies, big and small, will create new jobs and make the United States a more inviting place to do business. With an eye toward fairness and simplicity, we’re confident we can rebuild our tax code in a way that will grow our economy, better promote savings and investment, provide our job creators with a competitive advantage, and bring prosperity to all Americans.”
House Minority Leader Nancy Pelosi criticized President Trump’s tax plan as “short on details and long on giveaways to big corporations and billionaires.
“Instead of focusing on hard-working families as he promised, President Trump’s tax outline is a wish list for billionaires. What few details are here overwhelmingly cut taxes for the richest and do little for middle class Americans and those trying to get there. Besides which, nowhere does President Trump indicate how his deficit-exploding tax plan will actually be paid for. America cannot afford a Republican tax plan that hands multi-billion dollar tax breaks to the richest on the backs of the middle class. There is room for bipartisan tax reform, but it must be fiscally-responsible and it must not come at the expense of hard-working Americans.”