The House Ways and Means Committee held a hearing on tax reform and residential real estate, considering the effect of changing popular tax breaks like the mortgage interest deduction.

Thursday’s hearing showed little indication that Congress is ready to abandon such a popular tax break, especially as the housing and the construction industries finally show signs of rebounding from the mortgage crisis.

House Ways and Means Committee chairman Dave Camp, R-Mich., contended that it was important to fix the broken Tax Code to make it simpler, fairer and more transparent for families and employers.

“Homeownership is an integral part of the American dream, and the Tax Code has long provided a variety of incentives to make it easier for families to buy and own a home,” said Camp. “We also know that the real estate industry plays a large role in our economy. So, this is an area that needs careful, thoughtful review.”

Camp noted that a number of federal tax preferences provide benefits for residential real estate, each of which is governed by different rules and criteria. For example, only taxpayers who itemize their deductions may deduct mortgage interest. “Other interactions within the Tax Code can also limit the use of this provision,” said Camp. “By way of example, the deduction for interest on home equity indebtedness is disallowed for purposes of the Alternative Minimum Tax.”

He pointed out that federal tax benefits for real estate treat homeowners differently than renters. A taxpayer who pays $1,000 per month to rent an apartment may not deduct that amount from income, but a taxpayer who pays mortgage interest of $1,000 may take a deduction if they itemize, Camp noted. 

“You shouldn't need an army of lawyers and accountants to understand our Tax Code,” said Camp. “And, it shouldn’t take American taxpayers over 6 billion hours and $168 billion every year to comply with the code. We should get rid of the loopholes in the code and make it more efficient and effective for hardworking taxpayers.”

His Democratic counterpart on the committee sees more fruitful areas for tax reform. “Let’s be clear. There are many egregious loopholes in the Tax Code. But the main provisions incentivizing home ownership are policies, not loopholes,” said House Ways and Means ranking member Sander Levin, D-Mich. “The failure to differentiate which is which—between policies and real loopholes—has led to facile proposals. Among them are proposals that begin without the mortgage interest or any other deductions or proposals that simply pick a much lower top tax rate then present law without any suggestions as to how to fill the trillions in lost revenue that would result.”

He referred to a report from the Joint Committee on Taxation that found 70 percent of the benefit of the mortgage interest deduction goes to households earning less than $200,000 a year. Less than a third of the benefit, 30 percent, goes to those who make more than that.

“By comparison, the reduced rate for capital gains almost exclusively benefits the very wealthy,” said Levin. “More than 70 percent of the benefit of that lower rate flows to people making more than $1 million a year. Just 12 percent goes to those making less than $200,000. These tax policies deserve serious consideration, beyond the easy rhetoric about simply broadening the base and reducing rates.”

Gary Thomas, president of the National Association of Realtors, pointed to the longevity of the mortgage interest deduction in his testimony.

“Some provisions in the Tax Code, such as the deductions for mortgage interest and state and local taxes paid, have been part of the federal Tax Code since the income tax was introduced 100 years ago,” said Thomas. “Thus, the values of such tax benefits are both directly and indirectly embedded in the price of a home. While economists agree that there is no accurate measure of the value of those embedded tax benefits, they all generally agree that the value of a particular home includes tax benefits. Real estate is the most widely-held category of assets that American families own, and for many Americans, the largest portion of their family’s net worth, despite the price declines of the Great Recession. Therefore, while NAR agrees that reform and revision to different portions of the individual tax code may be warranted, we remain committed to preserving the current law incentives for homeownership and real estate investment.”

Mark Fleming, chief economist at CoreLogic, a company that analyzes data on the mortgage industry, discussed the recent positive trends in the housing sector.

“One of the brightest spots within the uneven economic recovery is the housing sector,” he said in his prepared testimony. “Residential investment contributed 0.4 percentage points to GDP growth in Q4 2012, significant for a single industrial sector.”

He noted that housing starts increased to an annualized rate of 1 million, which is 47 percent above the level for the same month a year ago and the largest increase in 20 years. Home prices increased 10.2 percent year over year, the biggest increase in nearly seven years. Fleming credited the rebound in the housing industry in part to stimulus measures such as the First-Time Homebuyer Tax Credit.

Eric Toder, co-director of the Urban-Brookings Tax Policy Center, noted that Congress’s Joint Committee on Taxation estimates that the mortgage interest deduction will reduce federal receipts by about $70 billion in fiscal year 2013 and by about $380 billion between fiscal years 2013 and 2017. Homeowners benefit from the deduction of real property taxes ($153 billion between 2013 and 2017) and the exemption of the first $250,000 ($500,000 for joint returns) of capital gains on the sale of principal residences ($130 billion between 2013 and 2017). However, he argued against eliminating the mortgage interest deduction.

“If the Committee is to achieve its stated goals of reducing the top individual income tax rate to 25 percent and maintaining receipts at their baseline projected level of 19.4 percent of GDP by the end of the decade, it will be necessary to eliminate or pare back some major tax expenditures,” said Toder. “But the mortgage interest deduction is one of the most popular benefits in the tax law, and politicians have in the past viewed it as untouchable. The mortgage interest deduction is the only tax benefit that President Reagan promised to protect in 1984 when his Treasury Department was preparing the wide-reaching reform proposals that would form the basis for the 1986 Tax Reform Act. In 2015, according to Tax Policy Center estimates, about 40 million taxpayers will benefit from the deduction.”

Robert Dietz, assistant vice president for tax and policy issues at the National Association of Home Builders, also cited the Tax Reform Act of 1986 in his testimony, but warned against any reforms that could hurt the real estate industry.

“Many in Congress have looked back to the tax reform efforts in 1986 as a guide for today,” he said. “And there are some important efforts to remember from that experience. First, it is possible to achieve those low [tax] rates and maintain strong incentives for housing. But we also saw for commercial and multifamily real estate the perils of significant tax policy changes. Most economists agree that the changes in the 1986 Act led to a crisis in commercial and multifamily real estate. How housing is dealt with in tax reform will shape the economy moving forward. Housing can be a key engine of job growth that this country needs.”