Tuesday, November 08, 2005

Tax Week

     One great thing about reading news on the web, as opposed to watching it on television, is the inadvertent juxtaposition of certain headlines. You'll almost never see this sort of analysis on "Fox & Friends", but it's so amazingly simple when it's laid out before you. For example, in late August of this year, on the same web page, I saw one headline that mentioned an upcoming summit on climate change and global warming and another headline talking about the fourth most powerful hurricane ever recorded in the Atlantic (at the time - Katrina was later surpassed by Rita and Wilma). Funny, huh? I'm not blaming Katrina's wrath on Bush's coziness with the energy industry. It's just hard not to appreciate the appropriateness of the timing. God may not play dice with the universe, but He certainly knows how to play jokes on it.
     Anyway, last week, the "big news" was that a tax reform advisory panel appointed by Bush made certain recommendations about revamping the tax code. Mostly they were tasked with trashing the Alternative Minimum Tax and finding money to pay for it. There's a lot to talk about, and it's interesting even if you don't work in finance. We'll discuss a lot of it during TAX WEEK, aka November 8-11. One of the proposals suggested was to alter the mortgage interest deduction. Interestingly enough, a headline on the next column on cnn.com read, "Housing Gets Less Affordable for Americans". Hmmmm.
     While I disagree with much of the panel's motivations, I actually think they have some very good ideas. The biggie change would be that instead of deducting interest on any mortgage up to $1 million, the maximum size of a deductible mortgage would range from $172,000 to $312,000, depending on the market. I hate to sound like a Republican, but for the record, a $300,000 loan isn't terribly extravagant. I live in one of the cheapest metro areas in the country (although you can find way cheaper homes if you move to rural Idaho), and the average "starter home" is like $224k. Of course, a lot of that price is related to low interest rates. The point is, this is HUGE. It makes owning a house more of a purchase and less of an investment. It effectively raises your interest rates for houses above the panel's recommended value. In one sense, this is good news for the economy, because instead of sinking wealth into overinflated property, people can invest it in things that will get businesses going. On the other hand, it's a tough blow for those people who enjoy having twice as many bedrooms as family members and a finished basement the size of their parents' whole house. Still, the whole point of a mortgage interest deduction is to spur home ownership, not subsidize luxury home ownership. One of my major concerns is that the panel (or Congress?) will be setting that maximum value in each market. A $250,000 cap in Alabama might be plenty for a McMansion, but if you give New York City anything less than $500,000, it will be extremely unfair. In Manhattan, a nice 1-bedroom apartment goes for $450,000. The fear is that maximums could be politically motivated. What if a Republican Congress wants to punish Blue-State New Yorkers and Californians?
     An interesting twist on the panel's proposal is changing the deduction to a 15% credit. What does this mean? It means everybody gets to remove 15% of their interest from their taxes. Everybody, regardless of whether their normal tax bracket is 10% or 30%. This is such a progressive proposal I'm shocked it came out of a Republican administration. Again, I feel like a Republican when I say that 15% is not high enough. Married couples making a combined $60,000 are out of the 15% bracket. That's hardly wealthy.
     Overall, however, I'm pleasantly surprised by this proposal. If Congress can somehow convince me that they can objectively set maximums in high-cost areas, I'll be very happy. I can adjust to getting a lower tax break if it means a fairer tax plan overall. I don't like the idea of shifting the upper-class's burden to the upper-middle class, but I expected nothing less of Bush. At least this proposal doesn't shift the burden to the lower-middle class or the poor.
     Mortgage Interest proposal Final Grade: B


Mr Furious said...

Nice write-up.

I have to confess, I was taken aback by this proposal when it was first announced. I am a homeowner, and the mortgage deduction is my biggest deduction.

My 80-year old, 1500 sq. ft. house in Ann Arbor is worth around $330K (my mortgage is around $200K). It's not Cali or NYC, but it is waaay above national average. Even so, the limits would likely be above me. But how localized will they set these limits? If I go twenty miles in any direction, houses are half the price of mine (or less). Will they account for that, or will I be screwed?

Since I lived in NYC for ten years before moving here, I am well aware of the costs there. My initial take was that this was a shift in burden from upper-class to middle class, but, even more a shift from red to blue state. I still believe that to be true, but I think the proposal sounds much worse than it actually is. Which works for me, since Bush and the Republicans will be the one's paying the price.

Sylvana said...

I don't trust anything from this administration. The mortgage deduction is HUGE for me and SSB. I don't know how we would get by if we lost that. We wouldn't have to worry about our property being over the maximum for awhile, but how do they plan on adjusting this for market changes?