What impact might these -- and possibly further-reaching future changes -- have on the housing market? Homebuilding, realty brokerage and banking industry leaders passionately oppose the deduction cutbacks because they believe they could lower property values and are ill timed in terms of the vulnerable state of the market. John Courson, president of the Mortgage Bankers Association, says even two years in advance of the actual starting date of the Obama plan, buyers will start "pricing in" the lower tax benefits -- discounting what they are willing to pay for a house given lower future deductions. Lawrence Yun, chief economist for the National Association of Realtors, says the devaluation ripple effect would extend to the lower- and middle-income segments as well. Joe Robson, chairman of the National Association of Home Builders, said "financing health care reforms by chipping away at the mortgage interest and real estate tax deductions ... will only hurt the ailing housing market and U.S. economy." No trade group has offered specific projections of price or sales reductions attributable to the cutbacks, however.
Is there a longer-range plan here? Obama himself has not referred to a broader agenda, but some of his top economic advisers have advocated major reforms of the federal tax system. For example, his budget director, Peter R. Orszag, is on record favoring scrapping current tax deduction incentives and replacing them with a system of "refundable tax credits." The credits would provide the identical dollar amounts to homeowners at all income and price brackets. The advantage of a uniform tax credit approach, Orszag argued in a 2006 paper for the Brookings Institution, is that it is usable by lower income and higher income taxpayers alike, whether they itemize or not. The credits would be "refundable" in that households who pay little or no income taxes could receive them as income supplements.
Could Congress agree with this year's budget proposals on tax write-offs? Given how deeply rooted the write-offs are in politics and the economy -- plus the fragile state of housing -- the odds would appear to be against it. But Obama is at the height of his game, and needs to come up with revenue to pay for health care reform from somewhere. So don't count him out