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Don't tax the American dream.

As the economy slowly recovers from one of the most significant recessions in our nation's history, both the administration and Congress have recommended new proposals to change the country's tax code. However, as these plans are set to move forward, I wonder how these policy choices were developed and analyzed. This curiosity comes from the fact that, from a strategic business perspective, some of them do not make good sense as a way to achieve short-term recovery or long-term sustainability objectives.

In particular, this column will focus on proposals related to the elimination of the mortgage interest tax deduction.

But first, let's reflect on how the American dream of homeowner-ship has helped form the fabric of our country and served as the cornerstone of our economic success. I know first-hand that being a homeowner changes a person's life forever. It means having your own piece of the American dream. Statistics are clear about the fact that children who live in homes owned by their parents achieve more in school and are happier because of the social stability homeownership provides.


There are many benefits from homeownership that accrue over time for individuals, families, communities and, of course, the country as a whole. The National Association of Realtors[R] (NAR), Chicago, notes that research has shown that the housing sector directly accounted for 16 percent of economic activity in 2005 while the net real estate household equity totaled $10.9 trillion. (I am well aware that the recent housing market downturn has significantly eroded this equity stake. However, over the long term, housing equity has still proven to be a solid pillar of growth.)

Homeownership yields other social benefits as well. It has reduced reliance on public assistance and has been tied to reduced crime rates and less domestic violence, as well as better health outcomes.

Additionally, homeownership offers a sense of pride about one's ability to succeed and encourages a sense of belonging to the community. Hence, I believe the mortgage interest tax deduction is more than just a tax benefit; it fosters better citizenship.

Recent federal government budget proposals suggest that the mortgage interest deduction should be reduced for homeowners in specific tax brackets. Specifically, according to an article in the Feb. 26, 2009, online issue of U.S. News & World Report, the reduction in mortgage tax deductions for those taxpayers in the 33 percent and 35 percent tax brackets would yield $318 billion over 10 years. This bracket consists of single people with taxable earnings of $208,850 and couples with taxable earnings of $250,000.

Under the proposal, those taxpayers would see a reduction of S70 for every $1,000 of mortgage interest they paid, according to a Feb. 26, 2009 issue of The Wall Street Journal.

So, this means that a couple who pays $30,000 in mortgage interest--which in today's world is not a lot; it wouldn't buy a lot of house, particularly on the East Coast or in California--then loses $2,100 in mortgage interest deduction. In states where the median cost of a home remains quite high, the impact would be far greater.

In considering the consequences of this proposal, I wonder what types of parameters were used to make decisions. Why was this particular income bracket selected? How did this group of taxpayers all of a sudden become known as the wealthy elite? What estimates were done to determine how this proposal would benefit the country?

Before explaining the true cost of such a decision and its negative effect on the health of the housing market and the economy, it might be helpful to provide some context by going through a brief history of the mortgage interest tax deduction.

In 1894, the first modern federal income tax was created and, at that time, all types of interest were deductible. Then the Supreme Court decided that income tax in general was unconstitutional. In 1913, the U.S. Constitution was amended and interest was deductible again.

Born out of the social policy of the 1940s, the mortgage interest deduction has become embedded in the minds of Americans as one of the incentives to purchase a home. In 1986, the policy was amended again, eliminating credit card interest deductions and leaving the mortgage interest deduction with a cap. The cap allowed a deduction of up to $1 million on a first or second home and $ 100,000 on a home-equity loan, according to the Tax Foundation, Washington, D.C.

But let's return to the current budget proposal to scale back the mortgage interest deduction and eventually eliminate it. This approach tends to hurt more than help our country. It is interesting to note how quick many in the media and in government are to assume that taxpayers in the 33 percent to 35 percent tax bracket are wealthy. However, in today's economy, it is not that difficult to reach this bracket, especially if one has a college degree and enters growth sectors of the economy such as technology, health care or environmental science. For instance, a couple where each owns a business, or a single person working in competitive high-paying fields can easily reach this income bracket.

Remember, too, that this bracket not only includes income but other sources of revenue, so it is not as hard as one might think to fit into the government's new parameters of the wealthy. I bet if you were to ask someone in this bracket living in California if they feel rich, you might elicit a laugh or two. Certainly, this amount of money no longer goes as far as it once did.

I also wonder why this group of Americans should be targeted to pay the majority of taxes in this country while others do not contribute their fair share on an equivalent basis. The tax payments for those households, earning more than $250,000, is 10 times the tax paid by households earning between $40,000 and $75,000 per year.

In a March 2, 2009, statement from the Washington, D.C.--based National Association of Home Builders (NAHB), it was noted: "The notion of robbing Peter to pay Paul just won't work. ... This week alone, existing-home sales dropped another 5.3 percent and new-homes sales plunged 10.2 percent. The months supply of unsold homes is at an all-time high. Financing health-care reforms by chipping away at the mortgage interest and real estate tax deductions is certainly not the answer. This will only hurt the ailing housing market and U.S. economy."

It is difficult to determine what sort of budgetary benefit the administration believes this tax policy would accomplish. This is especially true when you consider that the tax bracket being targeted only consists of 2 percent of the nation's homeowners, according to NAR (as quoted in The Orange County Register).

Some legislators who want to eliminate the mortgage interest deduction believe that having such tax policy in place simply encourages people to overextend themselves by trying to purchase a larger house than they can afford. Citing abuses that occurred in the mortgage industry during the last four years, legislators now seem to be trying to make laws that dictate to consumers how they should spend their money. It amounts to a kind of "trust me, I know best" approach to economic policy.

Frankly, this perspective should not be the basis of future tax policy. The mortgage industry knows that mortgages must be underwritten properly with full documentation. Our goal has always been to get people into homes they can truly afford. But that's probably a subject for another column.

The mortgage interest tax deduction is a key factor that people consider when purchasing a home. But it's only one factor. Consumers buy houses because they like the neighborhood, they like the schools, they like the commute--so it's not just a matter of how much tax benefit they will receive. Homes provide shelter, a sense of community and comfort. And homes provide a platform for future wealth if held over a long period of time, and they can play a key role in future financial planning. And reverse mortgages may end up saving many a future senior whose retirement savings ends up being woefully inadequate.

As a linchpin of the economy, the housing industry needs support from government policy that is designed to help hardworking Americans. How does placing a limit on the mortgage interest deduction achieve that goal? To me, this approach amounts to killing part of the American dream and works against the very fundamentals that have attracted millions of people to this country. What's more the timing of this proposal makes even less sense. Why do this in a fragile economy still reeling from the effects of a deep recession? Such a move, if adopted, could delay the recovery of the housing industry.

In its March 2009 statement, the NAHB noted: "With the housing market still reeling from its worst downturn since the Great Depression, this is not the time to talk about raising taxes on homebuyers and homeowners. This proposal will increase the cost of housing for many middle-class families, particularly in high-cost areas such as California and the Northeast, which will only further undercut the housing market, exert more downward pressure on home values and work against the president's efforts to stabilize housing and turn this economy around."

Successful policymaking should be based on examining the big picture and the various impacts that certain decisions will have on all stakeholders. In this case, there will be a negative impact on both individuals and businesses.

California is a good example of how not to rely on taxes to raise funds and balance the budget. The recent income tax increases in the state of California have caused individuals to think about moving their families and businesses to other states, thereby decreasing available jobs and hurting those who remain. This is nothing new for California, as past financial burdens resulted in a mass exodus from the state.

Instead of achieving more revenue from taxes, California's tax base is shrinking. The state will be pushed closer to the brink of bankruptcy. So, too, the budget proposal by the current administration could have a similar effect where fewer individuals and families will find it in their budgets to afford homeownership.

It is my belief that the decision to eliminate the mortgage interest deduction is a short-term approach to the economic issues still impacting our country. I'm afraid that we are losing the spirit that has made our country so great and so attractive to the millions of people who clamor to move here from other parts of the world. Taking away such incentives for a bracket of citizens who are some of the most productive members of our society will end up raising the long-term costs far higher than any short-term benefits that might be achieved.

In returning to my original question about how this proposal was formulated and what kind of analysis was done, I wonder if other alternatives were even considered. For instance, maybe it is time to once again consider doing away with all deductions and return to a flat tax. Also, on the table is a new tax-reform proposal that merits further study. (However, I should note here this is my own personal view and not part of Mortgage Bankers Association policy.)

Billed as a bipartisan plan for tax fairness by Senators Ron Wyden (D-Oregon) and Judd Gregg (R-New Hampshire), tax brackets are reduced from six to three--15 percent, 25 percent and 35 percent--and the tax code is simplified for individuals and families by eliminating the alternative minimum tax, according to a Feb. 23, 2010, Wall Street Journal article.

Although the tax code would be simplified, certain benefits would be retained for citizens, including the preservation of deductions for mortgage interest, charitable contributions, and child tax credits, according to Bloomberg. Additionally, there would be a flat corporate tax that could assist with providing a greater competitive advantage and increased job creation for U.S. firms, which would also expand our nation's economy.

Alternative strategies should be analyzed and measured for their ability to provide the best benefits for all stakeholders--government, businesses, families and individuals. As it stands, eliminating the mortgage interest deduction does not make short-term or long-term fiscal sense. Let's find the right means for injecting new hope and opportunity into the American dream and continue to leverage the economic advantages of homeownership.

John M. Robbins, CMB, is a former chairman of the Mortgage Bankers Association (MBA). He served as chairman and chief executive officer of American Mortgage Network Inc. prior to its sale to Wachovia in 2005.
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Title Annotation:Executive Suite
Author:Robbins, John M.
Publication:Mortgage Banking
Article Type:Column
Geographic Code:1USA
Date:Apr 1, 2010
Previous Article:The ticker.
Next Article:April-September 2010.

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