The President’s Budget includes policies that, if enacted, would have impacts on the housing market and home builders, including a number of tax increases.
While the budget proposal is not a legislative proposal that the Congress will consider in full, the set of policies contained in the document do represent a wish-list for the administration. And with tax reform discussions underway within the House Ways and Means and Senate Finance Committees, it worth examining the proposals submitted by the President to Congress.
Overall, the president has endorsed revenue neutral corporate tax reform, which would involve eliminating certain tax credits and deductions for C Corporations and reducing the applicable corporate tax rate. Such an approach would leave taxes on pass-thru and sole proprietorship income unchanged. Many in Congress, including Chairman Dave Camp of the Ways and Means Committee, have rejected this approach and are working toward tax reform involving both the corporate and individual sides of the tax code.
The President’s proposal also includes a change to how inflation is calculated for both entitlements and income tax brackets. This chained CPI definition reports a smaller increase in inflation than the traditional CPI approach because it allows for greater consumer substitution among goods. This methodological change is estimated to reduce deficits by $230 billion over ten years through a combination of reduced (projected) government spending (Social Security) and income tax bracket creep.
All in, the budget proposals would purportedly reduce deficits by an additional $1.8 trillion, bringing total deficit reduction to more than $4 trillion when combined with other efforts from the last two years. Estimating an exact scorecard is difficult however due to varying baselines and how to account for declines in spending due to such items as reduced costs for military expenses.
28% Cap on Certain Deductions, Exemptions and Exclusions
Proposed in prior year budgets in more narrow forms, this proposal would limit the tax value of certain tax expenditures for taxpayers paying more than a 28% marginal income tax rate. In particular, the proposal would limit the value of the mortgage interest deduction and real estate tax deduction for homeowners, particularly in high cost areas, for taxpayers with adjusted gross income of more than $223,050 ($183,250 if single). The cap would apply to all itemized deductions.
Additionally, the proposal would tax in part currently tax-exempt items such as tax-exempt bond income (including multifamily tax exempt bonds) and the employer-paid health insurance exclusion and self-employed health insurance costs. Certain “above the line” deductions, such as moving expenses, would also be subject to the cap.
Finally, small businesses, including home builders and remodelers, who claim the section 199 domestic activities deduction would also face potential tax hikes in the form of the 28% cap. It is worth noting that section 199 is available for both corporations and pass-thru/sole proprietorships, and this proposal would only affect the non C Corporation businesses, who tend to be smaller enterprises.
This proposal is estimated to raise $529 billion over ten years.
Despite being associated with hedge funds and private equity, this proposal would also have an impact on the multifamily sector, where the use of carried interest is a common financing mechanism to attract equity for the development of residential rental property. The proposal would require capital gain income from, among other items, sale of multifamily property to be taxed at ordinary income tax rates when the share of gain from the sale earned by the taxpayer exceeds the share of equity originally invested by taxpayer.
The proposal is estimated to raise $16 billion over ten years.
Debt Forgiveness for Principal Forgiveness
The proposal would extend from the end of 2013 to the end of 2015 the tax exclusion for forgiven or cancelled mortgage debt associated with a principal residence. This tax exclusion, in place since 2007, has facilitated short sales and certain debt workouts.
This proposal reduces federal tax receipts by $2.6 over ten years.
Small Business Section 179 Expensing Extended
The proposal would extend for 2014 and beyond the 2013 small business expensing rules. These rules include a $500,000 expensing deduction limit and a phaseout of the allowance beginning at $2 million of qualified investment.
This proposal reduces revenues by $69 billion over ten years.
The proposal would impose a new minimum tax of 30% on adjusted gross income reduced by a maximum 28% deduction for charitable giving. The rule would begin to apply on incomes of $1 million and be fully phased-in at $2 million. Ordinary business expenses would remain deductible.
This proposal raises $53 billion.
The proposal would repeal the Section 530 of the Revenue Act of 1978 rule protecting independent contractor status. The proposal would allow the IRS to issue new regulations dealing with the independent contractor versus employee classification using common law tests.
The proposal is estimated to raise $9 billion over ten years.
Contractor Reporting and Withholding
The proposal would require a business to verify the taxpayer identification number (TIN) with the IRS for all contractors receiving more than $600 in a year. If the contractor failed to provide a valid TIN, the business would be required to withhold a flat rate of taxes on the payments made to the contractor.
The proposal is estimated to raise $1 billion over ten years.
Energy Efficient Commercial Building Deduction
Under present law, the section 179D energy-efficient building deduction is available to commercial and multifamily properties (apartment buildings of more than three stories above grade). The proposal would reform the 179D tax rule to promote its use and achieve energy efficiencies for existing commercial and multifamily properties. Among other changes, the per square foot deduction amount would be increased to $3.
The proposal would reduce federal tax receipts by $5 billion over ten years.
The proposal would reinstate the 2009 rules regarding the estate tax, including increasing the tax rate from 40% to 45% and reducing the exemption amount from $5 million to $3.5 million.
The proposal would raise $71 billion over ten years.
Low-Income Housing Tax Credit
The budget proposal includes a number of changes intended to improve the effectiveness of the LIHTC program. These changes include a small increase of rate to the 70% present value credit (which absent the temporary 9% rate floor would fall to 7.43%). The proposal would change the formula producing a rate closer to 7.9%. The proposals would also allow certain income averaging for tenant requirements, allow states to convert some amounts of unused private activity bond cap for LIHTC credit use, and make changes that would permit REITs to invest in LIHTC partnerships.
Together these proposals reduce tax receipts by $1.4 billion over ten years.
Other Fiscal Policy Proposals
Streamline HARP to Allow for Additional Refinancing
The proposal calls for legislation to modify the HARP program to increase access and lower costs to allow refinancing of mortgages that are not backed by the GSEs in order to reduce monthly costs for underwater homeowners.
Neighborhood Stabilization Efforts
The budget provides funding for rehabilitating, repurposing, and demolishing vacant and blighted properties. In addition, the budget includes funding to support public-private land banks, provide grants to areas with high-levels of vacancies or severe blight, and offer loan subsidies to stimulate private investment.
The budget reduces funding for the HOME program by 5% relative to 2012 levels.