Tax write-offs: Deficit casualty?

Could the forthcoming report of a bipartisan presidential deficit-reduction
commission — due Dec. 1 — lead to fundamental changes in the way
homeownership is treated by the federal tax system?

Are you kidding? For decades the political rule on Capitol Hill has been that
nobody messes with homeowners’ tax benefits — mortgage interest deductions,
capital gains exclusions, property tax write-offs — even if they cost the government
hundreds of billions of dollars in tax revenues a year and increase the federal
deficit.

But now the sheer size of the country’s fiscal problems — a $1.3 trillion deficit for
2010 and a fast-mounting $13.6 trillion debt overall — could be slowly altering
the equation. Not only are some Republicans and Democrats joining in support
of plans to lower the deficit through across-the-board cuts in defense spending,
social programs and tax subsidies, but even leaders in the real estate industry are
speaking up.

At an opening session Oct. 14 of the annual fall meeting of the Urban Land
Institute, all five of the panelists — Democrats and Republicans — agreed that while
continuing tax system support for housing is important, the current mix of tax
incentives is costly and imbalanced — favoring home ownership disproportionately
over rental housing alternatives.

At a private meeting following that session, one of the panelists, Henry Cisneros,
secretary of housing and urban development during former President Bill Clinton’s first
term, said serious leaders on both sides of the political aisle increasingly believe
that the weight of public debt — plus the hundreds of billions of dollars per year
required to make interest payments to creditors — could wreck the economy within
the decade.

“This is a catastrophe looming,” said Cisneros, citing a Congressional Budget
Office estimate that the public debt will amount to 69 percent of the national gross
domestic product by 2020 — hobbling the country with $778 billion in annual
interest payments simply to service that debt.

Since leaving public office, Cisneros has been in the housing development industry
and is currently executive chairman of realty investment company CityView.
Though Cisneros has long been an ardent proponent of homeownership, he now
believes that the real estate and housing industries must be willing to contribute

their fair share to any “comprehensive long-term plan” to balance the budget.

J. Ronald Terwilliger, the former CEO of giant developer Trammell Crow
Residential and a contributor to some Republican campaigns, agreed that federal
tax incentives for ownership should be throttled back — “a phased-in reduction”
over a period of years so as not to worsen an already-strained housing market.

Steve Preston, the last secretary of HUD under George W. Bush, suggested that
a “comprehensive policy” covering all key sectors of the economy stands the best
chance of gaining the broad political support needed to push a deficit-reduction
and balanced budget program through a fractious Congress.

In theory at least, that is what the National Commission on Fiscal Responsibility
and Reform is supposed to deliver to President Barack Obama six weeks from now.
The 18-member commission has been holding hearings and gathering deficit-
reduction ideas since February. Most of the commissioners are current members
of Congress, but the group also includes representatives of private industry and
labor. Though the commission has provided no public hints of where it is headed,
housing analysts say it’s inevitable that it will propose cutbacks to tax subsidies for
real estate.

Likely targets: The mortgage interest deduction, which added about $100 billion
to the deficit in fiscal 2010 and more than $400 billion during the last five years,
according to congressional estimates; capital gains exclusions for home sale
profits, which cost more than $128 billion between fiscal 2006 and 2010; and
property tax write-offs, which cost $70 billion-plus during the same period.

Though virtually no one in the real estate industry supports elimination of tax
benefits for homeownership, many economists and deficit-reduction experts say
some form of cutbacks will be essential to help balance the budget at some point.

Robert Bixby, executive director of the nonpartisan Concord Coalition, which
advocates for deficit reduction, says write-offs such as the mortgage interest
deduction could be reduced significantly below the current $1.1 million
loan amount maximum without diminishing the financial attractiveness of
homeownership for the vast majority of consumers.

But is any of this politically doable? Tough question, but the answer is: not unless
the deficit-reduction commission comes to Congress with a powerful and skillfully
balanced set of recommendations that require concessions from every interest — real estate included — in order to meet the larger goal of rescuing the economy
from debilitating debt.

Ken Harney is a real estate columnist with the Washington Post.