By: John Straka
Unsurprisingly, Washington deficit hawks have been eyeing the “sacred cows” of tax preferences for homeownership for some time now. Policymakers might even unwind or eliminate the mortgage interest deductions and capital-gains exemptions on home appreciation that have been in place in the U.S for many decades. There is an economic case to be made for doing this—more efficient resource allocation of capital, other countries have high ownership rates without such tax preferences, etc.
But if you call or email or tweet Congress, and you choose this subject, my advice is to tell them that they should wait unti it’s 2005. In other words, now—or even the next few years most likely—is definitely not a good time at all to eliminate these housing tax preferences. We need to wait until it’s something like “2005”—when housing markets are much stronger again (hopefully) and state and local government finances are far from their relatively dire straits at present. If we don’t do this right, and insist on making big changes here now, then housing will take an immediate hit, and so will employment from both the housing sector and state and local governments (with further state and local service cutbacks also, due to budget shortfalls).
The reason for this, of course, is that most homeowners today have not really benefited much, and won’t, from those well-established tax preferences. Why not? Because these preferences have been in place for so long now that the economic value (expected present discounted value) of these tax savings was long ago baked into the level of home prices that most homeowners paid when they bought their homes. Take the preferences away now, and the value of homes will immediately drop, and therefore so will property tax revenues collected by local governments across the U.S.
This strategy will thus further bash the state- and-local sector in order to plump up some (we hope) our federal tax revenues by the value of the tax preferences. Housing will become a further drag on economic growth, and so will the resulting employment losses from both construction and local government services. As a result, it’s possible that on net the federal government may actually lose revenue from making this kind of change at precisely the wrong time.
It may very well never be quite like “2005” again. But waiting for greater housing and local government strength to change long-standing housing tax preferences should make the macroeconomic impact smaller, less visible, and more easily absorbed.