On Point: Housing subsidy on the chopping block?

By Joe Nathanson

The Daily Record Newswire

In recent weeks much of the nation was focused on the intense wrangling within the U.S. Congress over the need to raise this country's statutory debt limit.

There was something of the theater of the absurd in these negotiations. After all, hadn't the majority in the House of Representatives voted just a few months earlier on a budget resolution that would have the nation's debt increasing by another $5.1 trillion over the coming decade?

In any case, the debate on the debt limit was resolved in the 11th hour by legislation that will reduce federal spending by $900 billion over the 2012-2021 decade. Additionally, a super-committee of six senators and six representatives, formally known as the Joint Select Committee on Deficit Reduction, has been created to do what Congress as a whole could not: find another $1.5 trillion in deficit reduction between now and Thanksgiving.

What does all of this matter to urban and regional affairs? As we will find out soon enough, one way to make significant cuts would be to target a major federal housing subsidy.

You might think I'm referring to such budget items as HUD's Section 8 program, providing rental assistance to low-income individuals and families, which is proposed at a level of $17.2 billion in FY 2012.

Or perhaps we might look at public housing programs, with capital and operating costs currently running at about $7.3 billion yearly.

Some might go after the Low-Income Housing Tax Credit, which costs the U.S. Treasury Department another few billions in a normal market year, on the mistaken belief that its benefits go unfairly to major banks. The banks and other investors receive the tax credit in return for providing capital for the only program that has been providing new affordable housing in recent years.

A tempting target

But no, all of these housing assistance programs are relatively small in the scheme of things.

I'm talking about going after the biggest housing subsidy of all -- the Mortgage Interest Tax Deduction. According to a study by Margery Turner at the Urban Institute in Washington, this subsidy (tax expenditure, in congressional terms) will cost the Treasury $131 billion in 2012.

This deduction has been around since the beginning of itemized deductions in the tax code. The bipartisan Simpson-Bowles commission included it as one source of deficit reduction when it submitted its report last December.

Those in the housing and real estate industries immediately saw the potential damage such a change in the tax code could mean. Housing values are certainly impacted by the knowledge that tax credits are part of the financial calculation in a home-buying decision.

Indeed, there is every reason to believe that housing values would be lowered to some degree until a new equilibrium was reached over a period of time.

Of course, the deduction does not have to be removed entirely. Most proposals have suggested that the deduction be capped at $500,000 (the current cap is $1 million). But the elimination of the deduction might also extend to second homes and home equity loans.

The phase-in option

As with other features of the overall deficit reduction approach, these changes could be phased in over a period of time, perhaps five years or more.

Indeed, one measure that could be used as an element of economic stimulus (needed much more than deficit reduction, right now), would be to announce the change in policy this year, while beginning the phase-in two or three years in the future. This should lead to a near-term spurt in home buying, a boost to a much depressed industry.

From the standpoint of regional development, the elimination (highly unlikely) or the reduction (more plausible) of this tax deduction also reduces the likelihood of home buyers choosing ever-larger residences. Some have suggested that one effect would be to mitigate against urban sprawl.

With the benefits of the mortgage interest deduction accruing disproportionately to higher-income households, this might be something that those looking for a more progressive income tax could support. This is just one of the thorny areas likely to be debated through the fall.

But those directly involved, as well as all of us, must remember that failure to reach a consensus will lead to cuts less carefully thought out -- $600 billion to defense and related national security programs and $600 billion to domestic spending categories over the coming decade.

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Joe Nathanson heads Urban Information Associates, Inc., a Baltimore-based economic and community development consulting firm. He can be contacted at urbaninfo@comcast.net.

Published: Tue, Aug 30, 2011