“We want more people owning their own home. It is in our national interest that more people own their own home.” — President George W. Bush, December 16, 2003
Under the last Republican president, encouraging people to buy a home was an explicit government priority, a cornerstone of the Bush administration’s “ownership society.” Bush proposed new tax credits to incentivize home buying, pushed for loan guarantees and easier lending standards, and signed legislation providing federal assistance for down-payments and closing costs for tens of thousands of Americans.
Nearly a decade-and-a-half later, that GOP mantra is no more. The sweeping tax overhaul House Republicans introduced on Thursday would eliminate or scale back some of the biggest incentives for home buying in federal law. It would lower by half, to $500,000, the cut-off for taking the popular mortgage-interest deduction, cap the property-tax deduction at $10,000, repeal the deduction for moving expenses, and force more people to pay taxes on the profits they earn from selling a home.
To a significant extent, the changes are designed to raise revenue to offset the steep cost of reducing overall tax rates for businesses and individuals. Republican authors of the plan say many of the families who might lose these benefits will see an overall tax cut—more than $1,000 in some cases—and that those whose taxes could go up are wealthier to begin with. But conservative policy analysts say the proposals also reflect lessons learned from the government’s role in the housing crash at the end of Bush’s presidency and mark a broader shift away from using the tax code to encourage specific economic decisions.
“We’ve had a tax code that was biased too much toward housing,” said R. Glenn Hubbard, dean of the Columbia Business School. “It’s one of the reasons we got in a housing crisis.” The Bush policies were specifically geared toward helping first-time and minority home buyers, but the long-term move toward looser credit standards and lower down-payment requirements—which began before his administration—was blamed in part for the wave of foreclosures that followed.
Hubbard served as the chairman of Bush’s Council of Economic Advisers for the first three years of his presidency. But while he said he backed the overall ownership society, which included policies to promote retirement savings and overhaul Social Security, he did not subscribe to the administration’s explicit push for home ownership. “I never supported it when President Bush wanted to do it,” Hubbard said in a phone interview. “Whether people decide to own a home or not is a personal decision. It shouldn’t be a policy objective.”
Conservatives frequently talk about creating a tax code that doesn’t pick “winners and losers” among industries, but that economic philosophy just as often takes a back seat to campaign politics and the influence of donors. “This is consistent with the Republican view on the economy,” said Stephen Oliner of the conservative American Enterprise Institute, “which is that the government should not really be in the business of directing how people choose to spend their money and that home ownership is one of those nudges that the tax code is doing.” Conservatives like Oliner also doubt the efficacy of the mortgage-interest deduction, which has roots in the U.S. tax code dating back more than a century. They argue it’s already built into the price of a home and artificially inflates the market.
For months, Republican tax-writers have been targeting the state-and-local tax deduction, a lucrative benefit that they believe offers an unfair subsidy to high-tax—and predominantly Democratic-led—states like New York, New Jersey, Illinois, and California. As an attempted compromise with Republican House members from those states, the Ways and Means Committee agreed to preserve the deduction for property taxes while capping it at $10,000. But the scaling back of tax breaks for home buying and selling went beyond what some lawmakers were expecting.
The proposed changes have generated blowback both from lawmakers representing New York and New Jersey and, not surprisingly, from the real-estate and homebuilding industry. “This bill puts us at risk of a housing recession, and we are gravely concerned about it,” said Granger MacDonald, chairman of the National Association of Home Builders. While current home owners won’t lose their deduction for mortgage interest, MacDonald said there are 7 million homes now on the market over the $500,000 price point. “Those 7 million homes lose value. They can’t be sold,” he said. “That means the people moving into those homes can’t sell their homes, so their homes lose value, and the chain continues downward.”
MacDonald said his organization had proposed an alternative, revenue-neutral home-buying tax credit but that Republican leaders had rejected it on the grounds that it was too new an idea to sell politically. “It has always been a Republican mantra that to use the tax code to incentivize certain types of social behavior is a valid public purpose,” he told me. “They’re changing their tune midstream after over 100 years of encouraging home ownership through the tax code. Now they are telling the baby boomer generation: Your house is going to lose value because we changed our mind.”
Industry objections aside, the GOP’s proposed changes are more of a course correction than a complete reversal. There will still be a number of incentives for home-buying in the tax code, including the mortgage-interest deduction for homes under $500,000 in price. But the combination of a reduction in several itemized tax breaks along with a doubling of the standard deduction means that in certain states, far fewer people will use the mortgage deduction. “They’re not going to be able to get any tax benefit from taking out a mortgage, so for them the change definitely is to make home ownership somewhat more expensive,” Oliner said.
Representative Dan Donovan, a New York Republican, said the average price of a home in his district covering Staten Island and parts of Brooklyn was more than $525,000. “In its current form, this bill is harmful to people I represent, and I can’t support it,” he said. In a phone interview on Friday, Donovan talked about constituents who spent years living in their in-laws’ basements so they could save up to buy a home. Home ownership, he said, was still a goal worthy of government support. “Is this something we should be encouraging people to do? Certainly,” he said.
Whether the Republican tax writers ultimately get their way on the mortgage provisions is in doubt. Opposition from rank-and-file members, along with President Trump, already killed proposed changes to the tax treatment popular 401k plans—another departure from the Bush-era focus on incentivizing retirement savings. The outcome of the debate over the next several weeks could determine just how much political currency the GOP’s ownership society still holds.
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