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Since Congress has taken off on its annual summer recess, you might assume that nothing is happening on Capitol Hill that could affect the taxes you pay on your home. Quite the reverse.
Staff members of the House and Senate tax-writing committees are busy putting together legislative drafts that may determine the fate of real estate’s most prized tax benefits – first and second home-mortgage interest deductions, property tax write-offs, capital gains exclusions and others.
Both committees’ chairmen have promised major tax reform proposals this fall. They’ve been evaluating deductions, credits and loopholes in terms of revenue costs and economic benefits, including the $70 billion-plus yearly expense of the mortgage interest write-off. The process that’s under way represents the most serious effort to simplify and reorganize federal tax law since the Tax Reform Act of 1986.
On the Senate side, Finance Committee Chairman Max Baucus, D-Mont., asked colleagues in both parties to submit recommendations on which tax preferences should be preserved, starting from a “blank slate” where all current benefits are eliminated. To provide senators political cover and deniability, the committee put all recommendations under a 50-year top-secret classification, and restricted access to them to just 10 staff members.
On the House side, Ways and Means Committee Chairman Dave Camp, R-Mich., instructed staff to move ahead with drafts during the recess, allowing the committee to consider a final tax reform bill in October. That would tee up the legislation for a possible full House floor vote.
So what’s really on the chopping block? Is there a possibility that as part of a comprehensive tax reform bill, preferences for homeownership could be reduced or phased out?
Here’s a quick overview: The House bill under construction seeks to reduce individual and corporate marginal tax rates across the board. Camp has said he wants to clear out deductions, exclusions and other long-time tax code subsidies enough to lower individual taxes to a top marginal rate of 25 percent, down from the current 39.6 percent. He also wants to eliminate the alternative minimum tax and slash corporate tax rates.
The problem, though, is that lowering tax rates to these levels would cost trillions of dollars in lost revenue over the coming decade and would only be partially paid for by eliminating or cutting the vast majority of current tax preferences, including for homeowners. Lowering the top marginal rate for individuals to 28 percent – instead of the proposed 25 percent – would help, some analysts say, but still might not close the lost-revenue gap.