Regardless of what Congress does with tax reform, they must provide a tax incentive for renters to become homeowners.
More than 100 years ago, Congress decided the United States should be a nation of homeowners. They understood the value of home ownership in creating and sustaining communities, promoting social stability, fostering educational opportunities and building wealth. To that end, they created a tax incentive by making interest payments deductible from taxes.
Now, as home ownership rates across the country decline and the middle class shrinks, some members of Congress are looking to nullify those home ownership incentives – including eliminating the deduction you get for paying local property taxes.
If a tax on home ownership passes, America’s households will lose out on hundreds of thousands of dollars of net-worth, neighborhoods will be weakened and we will continue to see the middle class decline.
Before it’s too late for us to have a say in the matter, let’s consider some of the realities about owning a home and why Congress should keep a tax incentive to encourage home ownership.
Reality No. 1: Owning a home is one of the best ways to build long-term wealth, providing both equity accumulation over time and tax benefits. In 2013, the median net worth of homeowner families was $195,400, while the median net worth of renters was $5,400, according to the Federal Reserve. Minorities struggling to get onto the housing wealth ladder will also find themselves at a disadvantage, further widening the wealth gap.
Reality No. 2: The social benefits of home ownership can’t be ignored. There’s no debating that home ownership strengthens communities, encourages higher civic participation, boosts children’s educational performance, lowers crime rates, and improves health care outcomes. Moreover, homeowners bring more stability to neighborhoods because they tend to move less often.
Reality No. 3: Home ownership helps provide predictability. Individuals can enjoy steady and consistent housing costs thanks to the tax incentive that allows them to own a home. That's because a fixed-rate mortgage payment might not change for 15 to 30 years, while rents typically increase 2 to 3 percent a year.
Reality No. 4: The deduction of state and local taxes (such as property taxes) prevents double taxation. As a taxpayer, you do not enjoy the use of money paid to state and local taxes. Therefore, the federal government allows you to deduct these from your federal income taxes. Eliminating this benefit will penalize California more than other states because of our high home prices and high tax rates.
Reality No. 5: It can be a home-purchasing catalyst that creates a favorable economic ripple effect. Home sales in this country generate more than 2.5 million private-sector jobs in an average year. For every two homes sold, one job is created. Any change that would make home buying less attractive will be detrimental to the housing industry and the nation’s economy.
Unless today’s lawmakers resist the temptation to change or eliminate the impact of home ownership tax incentives, the impact will be felt by tens of millions of people who own, or want to sell or buy a home. The potential ripple effect should not be underestimated. Since housing is widely regarded as a key economic driver, such actions could drive the country back into recession.
Not encouraging home ownership through the tax code and eliminating the property tax deduction is a de facto tax increase on homeowners and the middle class. If this White House administration truly wants to help working class citizens seeking the American Dream, then it is imperative to maintain a tax incentive for home ownership and protect Californians against double taxation.
We can’t allow tax reform to become a tax on home ownership.
Jared Martin is the president-elect of the California Association of REALTORS®.