Sunday, October 30, 2005

Tax Reform Will Prick Housing Bubble

The President’s Advisory Panel for Tax Reform will issue its recommendation Tuesday, November 1. One of the goals of the panel was to find enough savings in other areas to pay for the elimination of the Alternative Minimum Tax (AMT). According to the panel, “The AMT ensnares taxpayers by denying them exemptions and credits that are available under the regular tax system…..”

While I certainly concur with ridding the nation of the AMT, I do not agree with the panel’s recommendations on how to pay for its abolition. The panel revealed (leaked) this week that it would recommend cutting back on the deductability of home mortgage interest.

Currently, the interest on mortgages up to $1 million may be deducted as an itemized deduction. In 2002, 130 million federal taxpayers filed returns with only 46 million itemizing. Of those, 37 million claimed the mortgage-interest deduction. Sneak previews from the panel indicate that they will recommend that the mortgage interest deduction be limited to the amount paid on a $300,000 mortgage. Furthermore, they will recommend that interest paid on home equity loans or second mortgages be disallowed as an itemized deduction.

James Poterba, a member of the panel, stressed there would have to be a gradual transition period for any changes to the mortgage interest deduction to reduce the impact on the housing market. GOOD LUCK. It won’t happen. This change if passed, regardless of the phase in period, will push the housing market into a downturn similar to that of the commercial property in 1986. By removing the tax shelter for real estate investments, the 1986 Act significantly decreased the value of real estate investments which had been purchased and retained for their favored tax treatment. This change, despite its otherwise positive long-term impacts, contributed to the end of the real estate boom of the early to mid '80. Furthermore, this change was an important factor that helped produce the savings and loan crisis of the late 1980s.

I support another methodology. First, eliminate the AMT. This action would be paid for by 1) not implementing the new Medicare Prescription Drug Coverage slated to begin January 1, 2006. Our nation can ill-afford this new entitlement program! 2) Eliminating redundancies and ineffective programs within the U.S. Department of Education. Of course, this will leave the program with only 3 brief cases and two security guards. After these two actions are taken, the mortgage interest deduction should be abolished entirely.

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