Opinion

Rep. Davis, Houston and Tax Reform

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Posted: Sep 01, 2017 10:30 AM
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Rep. Davis, Houston and Tax Reform

As the waters slowly recede in Houston and the reality of a Noah's Ark level flood becomes a day to day living reality, the rebuilding of Houston will and must begin. Houses must be rebuilt, houses must be repaired, mold and other hazards that come with wet walls must be eliminated and repaired; lives must be allowed to return to normal.

Today, and for decades and decades past, Houston residents are and have been able to regain some lost financial ground through the tax code. To the extent that their losses exceed both $100 and 10% of their adjusted gross income, their costs of rebuilding are deductible for tax purposes. (As one would expect and to some extent hope, in the name of relative equity and to ensure that no one can game the system, the specific casualty rules in the Internal Revenue Code take a few minutes to understand, but at the end of the day, Houston, in great part will be rebuilt based upon this rarely used, perhaps arcane section of the Internal Revenue Code.

Assume Joe and Bethany earn $90,000 a year and own a home with a fair market value of $350,000. Assume their home insurance policy will pay them $250,000 and the total cost of rebuilding will be $300,000. They have a gap to fill of $50,000 before they can return to a fully repaired home and begin life anew. In their 2017 tax return, they will get a tax deduction of $41,000 ($300,000 repair costs less $250,000 from the insurance company equals their personal cost of repairs at $50,000. There will be the 10% limitation of their $90,000 of income before they are allowed a casualty loss deduction for tax purposes. $50,000 less $9,000 = $41,000.) If they have a 30% tax rate, their bottom line will be that their taxes will be reduced by $12,300 to help defray the cost of rebuilding. I see this as a very good thing.

Tax scholars tell us that there are three possible reasons that Congress enacts each and every tax deduction in the Internal Revenue Code. It can be politically popular. It can be beneficial to the economy and/or socially, it can be virtuous. The casualty loss deduction meets all three tests. Virtually everyone wants Houston and its surrounding areas to rebuild as quickly as possible. It is essential to the overall economy that Houston get its local economy back on track and socially, it is simply the right thing to do.

The "Better Way" tax reform introduced by Speaker Ryan in 2016 eliminated the casualty loss deduction. Hopefully, the elimination was no more than a drafting error and that would not be a terrible surprise as the last major nation-wide horrific casualty was half a decade ago.

The leadership of the Republican Party is set to meet on September 5th to discuss tax reform. Attending the meeting will be Representative Kevin Brady of Houston. Hopefully, what will come out of that meeting will include tax reform that has a continuation of the casualty loss deduction, a much better way for the country. Being from Houston, Representative Brady will have seen the disaster of Hurricane Harvey up close and personal. His constituents will be taking their casualty losses in their 2017 tax returns. Based on this experience alone, he should be an advocate to retain this important part of the Internal Revenue Code.