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The long journey ahead for tax reform and what it means for housing

Finally, some details on the proposed plan

Tax reform, including housing-related tax reform, still has a long road ahead despite Treasury Secretary Steven Mnuchin and White House Chief Economic Advisor Gary Cohn revealing the Trump administration’s tax plan on Wednesday.

A Goldman Sachs economic research report by Alec Phillips on the newly released tax plans answered some key questions regarding Wednesday’s announcement, including, “What did the White House announce?”

They provided little detail, and what detail was provided was mostly similar to President Trump’s campaign proposal. That said, there were some policy changes compared with the campaign proposal that provide clues about the direction the White House might take the debate. In addition, the Administration’s thinking on the fiscal impact of the tax cut is at least slightly clearer.

This announcement is simply the beginning of tax reform; any plan will require the eventual approval of Congress.

From here, the report stated it expects the President’s Budget, which the White House is predicted to submit a budget proposal to Congress in mid-May, to provide extra details regarding tax legislation. “At a minimum, it is likely to include more specifics regarding the potential effect on revenues and the deficit—as well as a general indication of the scale of its infrastructure plan,” the report stated.

The proposal, according to Phillips, appears to have changed in four areas compared with the campaign proposal. Here are those four areas:

1. A smaller tax cut for top income earners:

The White House proposal would lower the top marginal tax rate for individuals from 39.6% to 35%, rather than the 33% proposed in the campaign.

2. A smaller tax cut for middle-income individuals:

The proposal now calls for a standard deduction of $24k for couples rather than $30k. This is still roughly twice as much as the current standard deduction and is identical to the House Republican proposal.

3. Repeal of the state and local tax deduction:

The Trump campaign proposal was unclear about which, if any, individual tax deductions might be eliminated, but the current White House proposal is more specific; the deduction for state and local taxes would be eliminated, while the deductions for mortgage interest, charitable contributions, and retirement savings would be maintained.

4. A territorial tax system for business income:

The campaign proposal would have repealed the deferral of tax on income earned by foreign subsidiaries of US companies, and would have instead taxed those earnings at 15% minus foreign tax credits, amounting to what would effectively be a 15% minimum tax on foreign earnings. Instead, the revised White House plan would adopt a territorial tax system, which exempts foreign earnings from US tax.

So, there are basics of what is known so far about the plan. But even with scarce details, housing groups and associations gave their initial assessments of how the tax reform changes would impact the housing market and homebuyers.

“While the President’s tax proposal released today is well-intentioned, it’s a non-starter for homeowners and real estate professionals who see the benefits of housing and real estate investment at work every day,” said National Association of Realtors President William Brown.

Brown explained that by doubling the standard deduction and repealing the state and local tax deduction, the plan would effectively nullify the current tax benefits of owning a home for the vast majority of tax filers.

“The mortgage interest deduction and the state and local tax deduction make homeownership more affordable, while 1031 like-kind exchanges help investors keep inventory on the market and money flowing to local communities,” said Brown.

“Those tax incentives are at risk in the tax plan released today. Current homeowners could very well see their home’s value plummet and their equity evaporate if tax reform nullifies or eliminates the tax incentives they depend upon, while prospective homebuyers will see that dream pushed further out of reach.”

Ultimately, NAR is encouraged to see leaders in Washington doing their part with tax reform, but this new plan doesn’t work.

Along those same lines, Granger MacDonald, chairman of the National Association of Home Builders, stated that they commend President Trump for tackling tax reform and keeping the mortgage interest deduction as one of two individual deductions.

However, he said, “Doubling the standard deduction could severely marginalize the mortgage interest deduction, which would reduce housing demand and lead to lower home values.”

"On the corporate side, NAHB strongly supports the provision to lower the tax rate to 15% for pass-through entities. This would provide much-needed tax relief for America's small businesses, which generate the lion's share of job and economic growth,” said MacDonald. “Policymakers also need to take steps to ensure that lower corporate rates do not diminish the effectiveness of the Low Income Housing Tax Credit program, particularly given that the nation is experiencing an acute shortage of affordable housing.”

Speaking for credit unions, National Association of Federally-Insured Credit Unions President and CEO Dan Berger reiterated the benefits to consumers and the economy of credit unions' federal corporate income tax exemption as the Trump administration released its key principles on tax reform.

"NAFCU supports efforts to achieve reforms that will grow the economy, and a vital part of that should be preservation of credit unions' contributions to economic growth," said Berger. "We will remain engaged with the administration and Congress throughout the tax reform debate to ensure credit unions are protected in this process.”

The fate of housing in terms of tax reform is still unknown, as these reactions give a first look into what it could be.

Phillips summed it well in his Goldman Sachs report, stating, “We expect a long road ahead for tax legislation. While we believe there is a good chance that tax legislation becomes law—in fact, market participants might be underrating the odds of tax cuts, a change from earlier this year—there may be few concrete legislative actions on tax legislation over the next couple of months for markets to react to.”

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