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A crack in the foundation.

A national consensus that has shaped the very definition of America has been shattered. The once-common assumption across all segments of society and the political spectrum endorsing the quintessential American dream of owning one's home is under attack. Sure, the American people are as fervent as ever in their devotion to private homeownership. And, in Congress, somewhere between two-thirds and 80 percent of elected officials consider homeownership one of the most sacred of all legislative sacred cows. But, in the rarified atmosphere of public-policy debate on housing, the idea is not just increasingly suspect, it is coming under direct assault.

A redistributive tax policy appears to have gained some particularly staunch converts among housing experts in academia, in many affordable housing "research institutes" and among public housing advocates. Increasingly, in these housing policy think tanks the idea is that funding that provides housing for the poor in America should come from cutting back on the lost tax dollars that arise due to the mortgage interest deduction. The new dogma gathering momentum among some seeking major new sums to house America's poor and near-poor is that the mortgage interest deduction and other housing-related tax policies valued at $65 billion a year are an unfair subsidy to the middle class and should be capped or eliminated. "At every housing conference I attend," says one of the rare, free-market, housing-policy analysts, Carl Horowitz of the Heritage Foundation, "everyone complains constantly and bitterly about the enormous middle-class subsidy" they say is found in the federal tax code.

Many low-income housing advocates and their allies who have targeted the mortgage interest deduction are waging a battle that replays in microcosm the flawed class-warfare notions of earlier notable periods in the world's political history. But this time the idea is to take housing from the middle class and rich and give it to the poor. The stakes in this ideological battle are high. If the mortgage interest deduction is severely limited or eliminated, "it would convert America from a nation of homeowners to a nation of renters," says Norm Ture, head of the Institute of Research on Economics and Taxation. "It would be tantamount to abandoning the American dream."

Publicly, however, the tendency among many low-income housing advocates is to vent their spleen at the wealthy, not the middle class, because to do otherwise would be political suicide for their agenda. The folks at the National Housing Institute in East Orange, New Jersey, lampoon the mortgage interest deduction as a "mansion subsidy," according to the institute's director Patrick Morrissey, even though mansions typically do not carry large mortgages and thereby play no noteworthy role in the benefits received from the mortgage interest deduction. The deduction, rather, seems confined to the high end to the upwardly mobile segment of the upper middle class - those in society who have earned high incomes largely based on their own entrepreneurial talents and abilities. For those favoring the curtailment of the mortgage interest deduction to generate more funds for low-income housing, there appears to be little concern for the impact that such a cap on the deduction would have on either homeownership rates or on the personal finances of current and future homeowners - an effect that many tax economists calculate as potentially catastrophic.

According to a 1989 study prepared by John Savacool for The WEFA Group of Bala Cynwyd, Pennsylvania, a loss of the mortgage interest deduction would devastate the private housing sector and a weaken the entire American economy. Savacool estimated that if the mortgage interest deduction were eliminated, the real gross domestic product (GDP) would decline by an average of $33 billion per year over what it would otherwise be. Mortgage origination volume would fall by $60 billion per year and the number of first-time buyers would be reduced by between 3 percent and 6 percent, according to the study. This would occur even though home prices would fall and foreclosures would rise. There would be between 900,000 and 1.4 million fewer homeowners households, Savacool predicted. This would translate into 443,000 fewer homes sold per year and 100,000 less new single-family housing starts. Eliminating the deduction would also cause an average loss of 710,000 jobs per year and push the unemployment rate up by 0.5 percent, the study found.

According to tax policy experts, the devotees of using mortgage interest deduction revenues to pay for housing for the poor overestimate the tax revenues that would be available from setting limits on the deduction. These experts say such revenue predictions often widely miss the mark because the estimates typically neglect to factor in changes to behavior caused by such tax changes.


The attack on the mortgage interest deduction has intensified and grown increasingly shrill since the mid-1980s, as it has become more difficult to expand the federal budget for public housing in the face of protracted federal deficits. Indeed, the Omnibus Budget Reconciliation Act of 1990 incorporated a pay-as-you-go provision that requires all new programs for spending to identify new funding sources to cover their costs. Therefore, nearly all new spending programs will be forced to cannibalize existing programs or tax preferences to cover their costs. This idea fits nicely with the notion that it's "fair" to take tax benefits for housing from the rich and give them to the poor. In the current, election-year bidding war to cut taxes, the pay-as-you-go provision could bring even greater pressure to bear on the mortgage interest deduction.

Those seeking to restrict the mortgage interest deduction have in the last five years won two major victories in Congress, overturning 80 years of unwavering and near-universal support for the mortgage interest deduction. In 1987, Congress put a $1.1 million cap on the maximum mortgage size for which interest could be deducted. Mortgage amounts greater than that would lose interest deductibility for the portion that exceeded $1.1 million. And, in 1990, lawmakers passed a 3 percent reduction taken off the value of itemized deductions for families with adjusted gross incomes (AGIs) greater than $100,000. Only three major tax deductions remain in the code: mortgage interest, state and local taxes and charitable giving. Because the 3 percent provision works by subtracting 3 percent of itemized deductions for the amount that the taxpayer's AGI exceeds $100,000, a family earning $200,000 would lose $3,000 of deductions, and a family earning $400,000 would lose $9,000. The more the taxpayer's adjusted gross income exceeds $100,000, the greater the reduction of the itemized deductions. But, no taxpayer can lose more than 80 percent of the deductions covered by the provision and taxpayers always have the option of switching to the standard deduction, according to Richard Peach, deputy chief economist for the Mortgage Bankers Association of America (MBA). The 3 percent take on itemized deductions is known in Congress as the Pease provision, after its author and sponsor Representative Donald J. Pease (D-OH), a little-known congressman who represents a blue-collar, rust-belt community around Lorraine. Although he was not on the Senate-House budget conference committee, he managed to convince the committee to adopt it as a "back-door way to raise taxes on the rich," according to a source in Congressman Pease's office.

The effect of the Pease provision and other changes in the tax law enacted in 1990 that affect the mortgage interest deduction have led tax adviser William Baldwin to recommend in the January 20 issue of Forbes magazine that taxpayers who can afford it should pay off their mortgage because it has become a financial liability. This represents a complete reversal of Forbes' advice from a decade ago, when the American home was called the best investment anyone could make, and readers were encouraged to borrow to the maximum to buy the best home they could afford.

Tax reform's lingering effects

The erosion of the rock-solid tax foundation for real estate and homeownership began in 1986 when the Reagan administration's negotiators on tax reform failed to calculate the effect that a higher capital-gains tax and several other damaging tax changes would have on real estate. A key culprit in designing the 1986 tax reform package was the current director of the Office of Management and Budget, Richard Darman, then Treasury Under Secretary, according to Gary Robbins, a former tax policy analyst in the Treasury Department. Robbins, now a consultant in Arlington, Virginia, says Treasury negotiators failed to see that the higher capital-gains tax (rising from 20 to 28 percent) would not produce the revenue projections estimated by the Treasury and the Joint Tax Committee of Congress. He says he tried to show Treasury officials how the higher rate would tie up investments, producing less asset sales and, thus, lower tax revenues. Robbins says they also failed to heed his warning that it would lead to drastically lower commercial real estate values, which by his estimate, have fallen 17 percent because of provisions in the 1986 tax act.

The Tax Reform Act of 1987 also made the mortgage interest deduction more visible and thus vulnerable because all other consumer interest deductions were phased out. Since 1986, the Congressional Budget Office and the Joint Tax Committee have identified mortgage interest as a "tax expenditure" in their various budget and tax reports. The most recent Joint Tax Committee report, for example, says that homeowners will enjoy $65.1 billion in tax expenditure relief in 1991 - $38.8 billion for the mortgage interest deduction, $16.9 billion for the property tax deduction, $15.5 billion for the deferral of capital gains and $3.8 billion for the one-time exclusion of $125,000 from capital-gains tax for homeowners over 55.

The Pease amendment was part of an outburst of soak-the-rich fever - the likes of which probably had not been seen in Washington, D.C. since the Great Depression. It was, in essence, a successful counter-revolution that undoes the tax reform of 1986, according to William Niskanen, chairman of the Cato Institute and former head of the White House Council of Economic Advisers under President Reagan. As the budget summit negotiations proceeded in 1990, under the aegis of Budget Director Darman, congressional Republicans tried to make a deal with the Democrats to preserve the basic accomplishment of the Tax Reform Act of 1986, while bowing to the goals of the Democratic leadership to chip away further at the more well-off. The Democrats wanted to raise the top tax rate from 28 percent to 33 percent in return for an elimination of the 33 percent tax bubble that had slipped into the tax act in 1986. The bubble created an indirect tax on some upper-income groups by phasing out the personal exemptions. It did not apply to the wealthiest families, so it was more like a "soak-the-nearly-rich" provision.

The Republican initially wanted a lower capital-gains tax rate and were prepared to raise the top income tax rate to only 31 percent if they could get a lower capital-gains rate. The Democrats painted the lower capital-gains tax rate as a windfall for the rich, even though nearly 60 percent of the beneficiaries are families earning less than $50,000 - a statistic President Bush cited in this year's State of the Union address. The Republicans thought they had gained a temporary victory in their negotiations after they got rid of the 33 percent tax bubble in return for a third tax category of 31 percent. But, in the continued search for new revenues, the Republicans first lost what they had gained; the personal exemption bubble was re-inserted. Then, in the final hours of the budget negotiations, the Pease provision was incorporated into the bill, creating yet a second deductions bubble. The tax code, thus, ended up with a double bubble. "It was a way for the Republicans to keep their no-new-tax-rate pledge and still add progressivity to the taxes," according to a source in Representative Pease's office, who says the congressman personally lobbied Senate Republicans for his amendment. According to David Crowe, an economist at the National Association of Home Builders, the Pease provision represents a 0.9 percent increase in the marginal tax rate for those in the 31 percent tax category.

How did Representative Pease do it? According to a source in his office, in June 1990, he wrote a passionate letter to the members of the budget conference committee calling for higher taxes on the rich. He wanted a higher, direct, income tax rate, an aide in his office says, but he did not suggest that because it was viewed as politically impossible and would have been ammunition for Republicans for 1992. He toyed with suggesting the idea that all deductions for taxpayers earning $125,000 or more should be phased out, according to one of his staffers. Instead, he decided to recommend a modest curtailment of those deductions. Staff members of the tax and budget committees in both the House and Senate say initially there was no support for the Pease plan within the conference committee. Congressman Pease then went to the Joint Tax Committee to obtain revenue estimates of the impact of the provision on future tax revenues to bolster his case. An analyst on the Joint Tax Committee estimated the Pease limitation would produce $17.8 billion over a five-year period. According to both Democratic and Republican sources, that claim proved to be the key reason the Pease plan was adopted at the last minute after first being rejected. "The fact that something is a bad idea," says one staffer on the House Ways and Means Committee, "doesn't keep it from getting passed."

Support for Pease repeal

While it is too early to have revenue returns from the Internal Revenue Service to see if the Pease provision is producing the revenue claimed, already one organization is beating down the doors of Congress to get the Pease provision repealed. The Independent Sector, which is an umbrella organization representing charitable and not-fot-profit organizations, vigorously opposed the Pease provision in 1990. They feared that it might lead to declines in charitable giving. A "quick analysis" by the Joint Tax Committee in 1990 claimed it would have no effect on charitable giving, according to a source on the Joint Tax Committee. Robert Smucker, who heads government relations for the Independent Sector, partly agrees. "So far, there is no clear evidence that the provision has harmed charitable giving," he says, although there is anecdotal evidence and charitable giving rates have declined. "Our worry is that the 3 percent floor will become a 6 percent floor, then a 10 percent floor," Smucker says, noting that the chief accomplishment of the Pease provision may have been to get a limit on the books. "We look at what happened to the medical deduction," Smucker says, "which was cut in half over time after beginning with a modest floor."

On December 2, 1991, the Independent Sector sent a letter to the chairman of the House Ways and Means Committee, Dan Rostenkowski (D-IL), and the chairman of the Senate Finance Committee, Lloyd Bentsen (D-TX), asking that charities and state and local tax deductions be exempted from the Pease provision. Staff members on Capitol Hill say that representatives of state and local governments are lobbying even harder than the Independent Sector to have the Pease provision repealed. If the Independent Sector were to achieve that goal, it would leave only the mortgage interest deduction with a limit. Sources on both the House and Senate committees that received the letter are skeptical about the chances of the Pease provision being repealed, but do not rule it out. If the charitable deductions and state and local taxes are removed, then the whole Pease provision will be scrapped, one lobbyist said.

Pease skeptics

Will Pease deliver the promised tax revenues? A number of economists say it will not. Robbins says the estimates by the Joint Tax Committee are wrong and the committee's whole static analysis approach to estimating revenue produced by tax changes, an approach that is basically accepted uncritically by the Treasury, is flawed. State analysis fails to take into account behavioral changes that a tax policy change is likely to cause. "I doubt if Pease will raise any dough at all," Robbins says. This will happen because taxpayers with adjusted gross incomes over $100,000 with high mortgages would be tempted to pay off or pay down their mortgages. To do so they will cash-in assets that are currently producing interest or dividends, which are generating tax revenues. The government loses those revenues even as it supposedly gains from eliminating the tax benefit of deductions. Norm Ture is even more pessimistic on expected revenues from the provision. "In the long run, the Pease provision will be a revenue loser," Ture says. Floors on itemized deductions are unlikely to deliver any additional tax revenues until the income levels they are designed to affect reach into the heart of the middle class, where the homeowners can't escape paying more in taxes because they do not have the option of paying down or paying off their mortgages.

Ture sees yet another danger from the Pease provision. "The necessary consequence is to transfer the benefit of the interest deduction from the homeowner to landlords,' he says. If you look at the year 2000, with and without the Pease provision, you will have two distinctly different outcomes, Ture predicts. With Pease, more housing will be owned by landlords and less by homeowners than is currently the case. With landlords still able to enjoy the full benefits of deducting all interest in a higher tax bracket, the comparative advantage over homeowners will be increased. As a result there will be some shrinkage in the housing stock.

The Pease provision is not the only harmful tax policy already in place in terms of the mortgage interest deduction. Surprisingly, the reimposition of the personal exemption bubble in the tax code also devalues the mortgage interest deduction. It does this because it is an indirect increase in the marginal tax rate. A direct increase in the tax code would be tax neutral, because it also provides an equal offset in mortgage interest deduction. An indirect increase, however, leaves the mortgage interest deduction at the lower rate, creating a wedge between how interest income and interest expenses are treated. Forbes writer Baldwin estimates that this phase-out of the personal exemption (which is indexed and is currently pegged at $2,150 per exemption for 1991 or $2,300 for 1992) equals a 0.6 percent increase in the marginal tax rate per personal deduction. It applies to those with adjusted gross incomes in 1991 that start at $150,000 and continues until all personal exemptions are used up, lopping off 2 percent of the exemption for each $2,500 in income above $150,000. A family of six, therefore, could see its effective tax rate rise 3.6 percent above the 31 percent rate, according to Baldwin. Adding in the 0.9 percent tax hike represented by Pease brings the total indirect, double-bubble, tax rate to 37.5 percent, creating a fourth hidden tax bracket.

"It used to be that a dollar of interest income would just offset a dollar of interest deduction," Baldwin writes. "Now a dollar of income can cost you 35 cents in tax, while a dollar of deductions saves you only 31 cents." Nowadays, Baldwin says, tax policy "makes it more advantageous to take idle cash and pay down one's mortgage." Robbins, Niskanen, Crowe and Ture agree that further limits on mortgage interest deductions will bring this problem to the middle class. Because nearly all the pre-retirement middle class is carrying a mortgage they cannot afford to pay down, it will increase the attractiveness of renting over owning. Landlords, of course, will be able to pass along the full benefits of their interest deductions, furthering the bias toward renting.

The $1.1 million cap on the maximum mortgage size for which interest deductions can be taken has a murkier history than Pease. No one in Congress is willing to claim authorship of the provisions - making it, as Hill staffers like to joke, an "immaculate conception" provision. Indeed, it was passed behind closed doors in a House Ways and Means Committee session that locked out the Republicans entirely, according to a Hill source. It is widely speculated that Representative Sam M. Gibbons (D-FL) was the author of the provision, although he denies it. Hill staffers and lobbyists say Representative Gibbons introduced a provision to set a mortgage cap at $500,000, making that the maximum mortgage size against which mortgage interest deductions could be taken. One source said that provision tentatively was approved in the closed session, but when Chairman Rostenkowski heard about it, the chairman insisted it be raised to $1.1 million. At that level it covered only 3 households, according to source in Representative Gibbons office. The Florida congressman admits he asked the Treasury Department what revenues could be raised by limiting the deduction. That request ended up on Darman's desk. "Treasury provided a print-out," says a source in Representative Gibbons' office, "that showed that only 29 percent of all U.S. taxpayers claimed the mortgage interest deduction." This led the congressman to say that "the other 71 percent are subsidizing that 29 percent." While no precise figures are available as to the exact percentage of taxpayers that claim the mortgage interest deduction, it is logical to conclude that over their lifetimes, nearly double that 29 percent will actually use the interest deduction.

Defense strategies

The idea of imposing any mortgage limit at all so alarmed supporters of the mortgage interest deduction in Congress in 1986 that two lawmakers started their own defensive strategy to protect the mortgage interest deduction. A sense-of-the Congress resolution opposing any further limits on the mortgage interest deduction was co-sponsored by Representative Marge Roukema (R-NJ) and Representative Les AuCoin (D-OR) and sent around Congress with a "Dear Colleague" letter requesting support. The resolution ultimately gleaned 250 co-sponsors, approaching a majority of Congress. The alarm was not so much over the $1.1 million cap per se, as it was that this cap represented the "camel's nose under the tent," according to an aide in Representative Roukema's office who said the resolution was intended to send a message to those who worked behind closed doors to gain what they would not propose in the open light of public scrutiny. The message? "If you're going to try to limit the mortgage interest deduction, you'll have a fight on your hands," the aide said.

The Pease amendment revived the Roukema-AuCoin defense strategy in 1990, especially after the House Ways and Means Committee held a hearing during which a lower limit than $1.1 million was discussed. The issue was raised by Representative Thomas J. Downey (D-NY), who sought to determine what revenues could be generated if the mortgage interest deduction itself were simply limited for all taxpayers to a maximum of $30,000 of mortgage interest. His office declined to be interviewed for this article. Representative Downey's interest in a further cap " set off bells and whistles" among supporters of the deduction, especially because House Ways and Means Committee Chairman Rostenkowski had assured them the issue would not further explored, according to an aide in Representative Roukema's office. "If they're willing to discuss lowering it to $30,000, what's to stop them from going lower later on," says the aide. This led to a second "Dear Colleague" letter in January 1991, which directly referenced the Pease provision in its language, and which its sponsors say had gained 100 signatures since its introduction. The letter points out the key reasons the matter will be revisited this year, the pay-as-you-go provision in the 1990 budget accord.

The potential of a Downey provision also galvanized support for the mortgage interest deduction in the Senate. There, the principal gladiator defending the deduction in behind-the-scenes maneuvering is Senator Don Riegle (D-MI), chairman of the Banking, Housing and Urban Affairs Committee and a member of the Finance Committee - the tax-writing committee in the Senate. A number of Capitol Hill sources say that in 1990 he held other budget items hostage to prevent the passage of any further limits on the mortgage interest deduction. An aide in his office says he is prepared to do the same should the need arise again this year and in the future.

Other opponents of the mortgage interest deduction outside the halls of Congress have been busy in the past year nibbling away like termites on support for the deduction. Last summer a report was issued by the Congressional Research Service (CRS) recommending that the mortgage interest deduction be capped and that the saving be used to finance mortgage revenue bonds. These tax-free bonds are issued by housing finance agencies around the country to help provide below-market-rate mortgage funds for certain low-and moderate-in-come homebuyers. Because the interest income for bondholders is tax-free, the Treasury forgoes some tax revenues to support the bonds. The CRS report was requested anonymously - a departure from typical procedure where the work is requested by a named member of Congress and cited in the report. Indeed, one staff member on the Ways and Means Committee says that it was widely assumed in Congress that the author, Dennis Zimmerman, initiated the report on his own. Zimmerman essentially agrees. "The idea is mine," he says. After he came up with the proposal, he called around to various committee staff members and found an anonymous sponsor. Zimmerman counts himself among those want to strip the wealthy of what he believes are "unfair" tax subsidies for housing.

Outside Congress, some affordable housing advocates have begun taking a more high-profile tactics.

In a feature in the Washington news monthly National Journal former Federal Housing Administration Commissioner C. Austin Fitts was quoted saying that "middle-class families can't buy a house [because] they're too busy paying for people to live in mansions in Chevy Chase [and] second homes in Malibu." Fitts, however, also supports sharply curtailing the mortgage interest deduction and transferring the tax revenues to funding low-income housing programs.

Also, last years the authors of study that is underway the National Housing Institute began to promote the notion of capping mortgage interest by publishing op-ed pieces in out-of-the-way newspapers. The proposal, while not fully defined, is supposedly based on a study that is still underway, according to Morrissey at the institute.

Aggressive strikes by Twentieth


The boldest attack so far on the mortgage interest deduction, however, has come in a set of proposal from a foundation, the Twentieth Century Fund, which was endowed by a fortune created by Boston department store magnate Edward Filene. Filene made the "bargain basement" famous early in this century. The Fund's Task Force on Affordable Housing, after more than a year of deliberation, published in November 1991 a set of somewhat radical spending and taxing recommendation with potential far-reaching implications for the current housing market, according to several economists. The force's report, published in a book titled More Housing, More Fairly, recommends the nation should undertake a massive new reallocation of dollars devoted to housing by shifting more of the "federal commitment" away from the lost tax dollars going for the mortgage interest deduction and moving more into funding housing availability for lower income groups.

The task force's first recommendation is that Congress require the states to peg the shelter allocation in state welfare programs at the HUD-defined fair-market rent level for existing housing. Doing this would cost about $10 billion a year, the report notes. The task force recommends that the federal government pick up of the tab for the full increase in shelter allocations due to such a change in state welfare programs. The task force also recommends administering the higher shelter allocation through an expanded housing voucher program to be run by local public housing authorities and not state social-service agencies.

The task force also recommends funding some of the " most critical provisions of the National Affordable Housing Act of 1990" and expanding the affordable housing component written into the thrift bailout law. Specially, the task forces backs the idea behind the National Housing Partnership of creating a nonprofit foundation that would acquire existing multifamily rental properties from the Resolution Trust Corporation at market value for rental to low-, moderate-and middle-income families. Another recommendation in the report is that any move to privatize public housing units by selling them to tenants be accompanied by a unit-replacement of the public housing stock that is purchased.

The report concedes that the price tag of its recommendations runs close to "new federal spending of as much as $15 billion a year, phased in over the next few years."

To pay for the new initiatives, the task force proposed that the mortgage interest deduction be limited to only 15 percent for everyone including those in the 28 percent and 31 percent tax brackets. The report also recommends taxing the capital gains from the sale of a private home at 30 percent. The report sums up the two proposed tax changes this ways: "Reducing two of the largest tax expenditures made by the federal government can provide significant sources of funding for new programs without increasing net federal commitments. Specially, capping the mortgage interest deduction for all taxpayers at the 15 percent bracket (rather than allowing it to be worth 31 percent for wealthier families and 15 percent for poorer ones) would raise $15 billion a year - affecting only the wealthiest 2 percent of households - and taxing 30 percent of capital gains from the sale of housing would yield $10 billion a year. These are essential tools for reallocating existing federal subsidies toward those who need them most."

Upon closer examination, both option appears to have lifted wholesales from the Congressional Budget Office's annual publication Selected Spending and Revenue Options, published in June 1991.

The final report of the task force has received relatively modest attention in the mass media. Michael Stegman, a Universal of North Carolina housing professor on the task force, says the panel decided to identify potential funding sources for its big spending scheme in view of the pay-as-you-go provision of the 1990 budget agreement. This may only partly explained the redistributive leanings of the task force. Some of its members have long advocated curtailing the mortgage interest deduction, according to Horowitz. At least one task force member unofficially dissents from the program adopted by the task force. That member is Louis Winnick, a consultant for the Fund for the City of New York, a private foundation that funds charitable and non-profit service providers that operate in the city. Winnick says the task force had very little discussion about the impact of its proposal on homeownership. Although he objected to financing the recommendation on the back of the mortgage interest deduction and with higher taxes on capital gains from the sale of homes, he declined to speak out against them because he says the climate was unreceptive to dissenting views. "That would have required a fierce battle, and I decided to save my energy for other battles, "Winnick says. He joined the task force to promote tenant management of public housing, a policy recommendation that was ultimately adopted. He believes the proposals to partially scale back the mortgage interest deduction will be ignored by the political establishment. Stegman,, however, predicts " the study will have a longer shelf life than some people think."

The chairman of the task force, Thomas Johnson, former President of Manufacturers Hanover Trust Company, Inc. Hicksville, New York, also admits that there was little discussion of the impact that the report's proposals would have on homeownership. Johnson chose only a few of the members of the task force, he says. Twentieth Century Fund President Richard C. Leone asked Johnson to head the task force and selected nearly all the members, Johnson says. The policy discussion at task force meetings was guided by Tony Shorries, a paid consultant to the fund, who ultimately wrote the final report of the task force. Stegman says the policy recommendations emanated primarily from Shorries and Fitts, the former FHA commissioner, who was also on the task force, Johnson admits that some on the tasks force "have the view that the private housing market is a market a failure," but he says, I don't have that attitude." He personally does not favor reducing the mortgage interest deduction, except for second homes. He also agrees that even poor homeowners who do not itemize deductions benefit from the postponement of capital gains and the one-time $125,000 exclusion. In fact, he says that no effort should be made to adopt the recommendations without first adequately investigating their impact on homeownership.

Some housing industry groups and taxeconomists are taking the Twentieth Century Fund proposal seriously, busily estimating their impact preparing themselves for a possible push to get Congress to implement them in part or in whole against the backdrop of the upcoming budget legislation. Crowe at the National Association of Home Builders predicts that if the Twentieth Century Fund proposals are adopted, "It would pull the foundation right out from under the housing market." The proposal to curtail the mortgage interest deduction would immediately hit hardest on taxpayers in the 28 percent tax bracket, especially first-time homebuyers, Crowe said. That would be single taxpayers with taxable income of $20,350 or more and married couples filing jointly with taxable income of $34,000 or more - hardly a group that could be fairly described as wealthy homeowners. According to data compiled in HUD's American Survey of Housing for 1989, 60 percent of first-time homebuyers are in the 28 percent tax bracket. The reduced value of the mortgage interest deduction under the task force's proposal would hit most people just as they are able to afford their first house, Crowe says. Because only 10 percent of homes sales each year are paid for with cash, the Twentieth Century Fund proposals would hit hard at an important segment of the housing market. This would impairs the whole housing market because move-up buyers in the housing market depend on first-time buyers to sell their existing homes, Crowe explained. If the first-time buyers are severely harmed, it causes the whole housing market to stall. Realtors and other experts in the housing market refer to this as the ladder effect. If no new buyers step up onto the bottom rung of the ladder, those above cannot move up. The Twentieth Century Fund mortgage interest deduction proposal will also immobilize segments of the housing market, according to Susan Woodward, deputy assistant secretary in HUD's Office of Economic Affairs. People with mortgages in place could not afford to move to homes of comparable value. At the same time, those in the top tax bracket of 31 percent would lose half the value of the mortgage interest deduction, Crowe point out. This could force some struggling homeowners to sell their homes, driving down prices, and conceivably contributing to market conditions that would leave some homeowners with houses worth less than their mortgages. The bias in favor of the wealthy would actually be enhanced, according to Woodward, because the Twentieth Century Fund proposals would dramatically increase the advantage of paying cash for a house and dramatically reduce the financial feasibility of borrowing to buy. The wealthiest homeowners would pay down their mortgages to compensate for the lost deductions. But, upward mobility in housing would be greatly reduced.

In the final analysis, it seems that any attack around the margins of the mortgage interest deduction has the potential to unravel the whole underpinning of homeownership, perhaps only slowly over a period of time. The harm will hit the first-time buyer the hardest and the middle class the most. A long twilight struggle with housing socialism has begun, Horowitz says. Some low-income housing activists "wants to destroy the deduction on the installment plan," he says, to avoid causing alarm. Thus, those who support the broadest possible support of homeownership through tax policy will have to maintain unwavering vigilance to prevent further limits on the mortgage interest deduction or the roll-over provisions and one-time $125,000 tax exclusion for capital gains. What makes this tax policy issue more dicey is the current severe budget problems that put a straight-jacket on all federal government spending. The legislative environment makes all tax expenditures vulnerable - and the bigger they are the more vulnerable they are - regardless of what makes for good policy. Given that vulnerability, it would help if key political figures were more adamant in support of the mortgage interest deduction and the private housing market. While HUD Secretary Jack Kemp wants the poor to enjoyed the benefits of homeownership, no other major political figure is supporting with equal vigor tax policies that would preserve the American dream for for the rest of the population. Perhaps we could bring former British Prime Minister Margaret Thatcher out of retirement. She relentlessly advocated homeownership as a way to improve the self-sufficiency of British citizens and to break the welfare state legacy that had sapped Britain's economic vitality. Thatcher's deregulation of housing finance helped propel homeownership rates in British levels comparable to those in the U.S., according to Sir Alan Walters, free-market adviser to the Thatcher government who now works in Washington for AIG Trading Group.

The coming month of debate in Congress over setting budget and tax policy should be closely watched as they could have major impact on the long-term health of America's housing markets. Short-term solution to an admittedly acute budget crisis, if they catch fire to fund election-year promises, could make for long-term policy changes that turn homeownership in this country into more of a pipe dream than as achievable dream.
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Author:England, Robert Stowe
Publication:Mortgage Banking
Article Type:Cover Story
Date:Mar 1, 1992
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