Earlier this week, the White House unveiled specific details of President Obama’s recent jobs proposal (the American Jobs Act). The proposed $447 billion legislation contains a mix of helpful and worrying proposals for the housing sector.
From a positive perspective, some of the proposals should provide a short-term boost to economic growth and job creation. Without job creation, new households cannot form and housing demand will remain weak. The legislation offers an extension and expansion for 2012 of the payroll tax cut currently in place for 2011. For 2011, the normal 6.2% payroll tax rate on covered wages was reduced to 4.2%. The proposed legislation would reduce this even further to 3.1% in 2012. Such a tax cut should help consumer spending growth, but its impacts will be diluted by ongoing household deleveraging.
The bill would also lower the employer-paid portion of payroll tax, normally also 6.2% of covered wages, to 3.1% in 2012 for the first $5 million in wages. This $5 million limit means that this benefit would be targeted to small businesses. The bill would also extend expensing for business property (buildings however do not qualify) placed in service in 2012. The bill also extends the start date of the controversial 3% withholding requirement for contractors doing work for most government agencies. The present-law effective date for this requirement is 2012, and the bill would delay this rule until 2014.
The legislation also contains some additional hiring tax credits, although economists are of mixed opinion on whether such incentives are effective in creating jobs. The bill doubles the current tax credit for hiring disabled, long-term unemployed veterans to $9,600 and creates two new hiring credits; $2,400 for hiring an short-term unemployed veteran and a $4,000 tax credit for hiring any individual who has been unemployed longer than six months.
On the spending side, the legislation provides $15 billion to purchase and refurbish vacant and foreclosed homes. The funds would be allocated by both state/local governments and the federal governments, to for-profit and non-profit developers. Homes refurbished under this program would be required to be sold at a price no higher than the total cost of acquisition and rehabilitation. The bill also provides $25 billion for school modernization and $27 billion for highway and transportation repair and improvement. All spending proposals would be subject to Davis-Bacon wage rules.
President Obama also included a set of revenue raising proposals to offset the cost of the proposed legislation. Unfortunately for the housing sector, many of the proposals would have significant negative impacts on housing. And these proposals have been offered and criticized in previous budget debates, with one even having been significantly expanded.
The largest revenue raiser is to limit the size of certain deductions and exclusions to a 28 percent rate for high-income taxpayers (single taxpayers reporting more than $200,000 in adjusted gross income (AGI) and joint filers who report more than $250,000 in AGI). In previous versions of this proposal, the change would reduce the value of the mortgage interest deduction and the real estate tax deduction. For a middle-call taxpayer who lives in a high cost area and faces a 33 marginal tax rate, the value of the housing-related tax deductions could be reduced by up to 15%, thereby producing significant tax increases. A Tax Policy Center report found that such a move could reduce housing prices in large metropolitan areas by as much as 10 percent.
However, the 28 percent cap proposal as defined by the jobs bill is even larger than previous versions. Now under the proposal, tax-exempt bonds would no longer be tax-exempt. A portion of the bond income would now be taxable for high-income taxpayers, who being a significant portion of bond buyers could produce negative impacts for state and local governments to raise funds. Among the bonds that would be affected would be tax code section 142 multifamily rental bonds and section 143 mortgage revenue bonds, which provide funds for affordable mortgage financing for homebuyers.
Moreover, the proposed 28 percent cap would also affect a number of above-the-line deductions (deductions that can be claimed by itemizers and non-itemizers), such as the adjustment for qualified moving expenses, as well as the section 199 domestic production activities deduction. The reduction of the section 199 deduction, which can reduce taxable income up to 9 percent for home builders and other construction and manufacturing businesses, is particularly troublesome in that it would single out businesses organized as pass-thru entities (such as S Corporations and LLCs) but leave C Corporations unaffected.
Additionally, the bill once again proposes increasing the tax on capital gain due to a carried interest. As we have explained before, the use of carried interest is a common practice for multifamily developers, and would result in lower property tax revenues and reduced job creation for multifamily development. The proposal would increase the tax on some multifamily rental properties from 15% to rates as high as 35%, depending on how the project is financed.
All the proposed tax increases would take effect in 2013.
Given the ongoing weakness in housing, with nearly 1.5 million jobs lost in the residential construction sector, and the fact that home building typically leads the economy out of recession, it is disappointing to see a jobs package that includes tax provisions that would weaken housing’s contribution to economic growth. On balance, the positive effects from job creation offered by some of the proposals are outweighed by the negative tax recommendations that would increase taxes on future homebuyers, current homeowners, and rental housing developers, particularly in high cost areas of the nation. Add to that policy uncertainty from the president’s promised September 19th rollout of a budget proposal for supercommittee consideration, and it is difficult to see much policy support for housing for the duration of 2011.