## [Comments of]{.smallcaps}

## 

## [the]{.smallcaps}

## 

## [NATIONAL ASSOCIATION OF HOME BUILDERS]{.smallcaps}

## 

## [to]{.smallcaps}

## 

## [The President's Advisory Panel on Federal Tax Reform]{.smallcaps}

[June 10, 2005]{.smallcaps}

[National Association of Home Builders]{.smallcaps}

[1201 15^th^ St., NW]{.smallcaps}

[Washington, DC 20005]{.smallcaps}

[Contact: Marty Morris (202) 266-8285 or Jim Tobin (202)
266-8258]{.smallcaps}

**[Submission of an Association]{.smallcaps}**

The National Association of Home Builders (NAHB) represents more than
220,000 member firms involved in single-family and multifamily home
building, remodeling, property management, housing finance, building
product manufacturing and other aspects of residential and light
commercial construction. NAHB is pleased to comment on the tax reform
proposals that have been suggested to the President's Advisory Panel on
Federal Tax Reform (the Panel). NAHB strongly supports the President's
directive to the Panel to maintain homeownership incentives. Maintaining
housing incentives in any new tax system is essential to the health of
the national economy and well being of the American people.

**Tax Reform Proposals**

Given the large number of proposals that have been suggested to the
Panel, NAHB will comment on three generic categories of tax reform
proposals: modifying the current income tax without any new additional
types of tax; adding a new type of tax to the income tax, such as a
value added tax (VAT), and replacing the income tax with another form of
tax, such as a national retail sale tax (NRST).

[Reforming the Income Tax]{.underline}. In the context of recommending
revenue neutral tax reform proposals that preserve housing incentives,
NAHB supports retaining an income tax as the sole method of raising
general Federal revenues. The income tax: 1) retains progressivity and
the ability to adjust the conceptual implementation of progressivity in
a straightforward manner; 2) provides less chance of a wealth transfer
than other suggested proposals; 3) provides a means of promoting savings
and investment; and 4) provides a means for maintaining and advancing
housing preferences, which provide savings incentives.

NAHB supports a number of modifications to the income tax to preserve
and strengthen housing incentives, in accordance with the President's
charge to the Panel. Specifically, the Panel should recommend the
following:

1.  Index to inflation the eligible loan amount for the mortgage
    interest deduction.

2.  Index to inflation the capital gain exclusion for sales of
    residences.

3.  Repeal the individual and corporate Alternative Minimum Tax (AMT).

4.  If the AMTs cannot be fully repealed, at a minimum, a full exemption
    for state and local taxes and purchases of the Low Income Housing
    Tax Credit (LIHTC) should be provided under the individual AMT.

5.  Add a Homeownership Tax Credit (HOTC), such as the one proposed by
    the Bush Administration, to the tax code to develop housing for sale
    to low and moderate income homebuyers in difficult to develop areas.

> [Supplementing the Income Tax]{.underline}. NAHB is opposed to
> supplementing the income tax system with an additional tax, such as a
> VAT. Adding a second system of tax collection to the income tax will
> diminish the incentive structure of the income tax for socially
> desirable objectives, such as homeownership and charitable giving. The
> proposals to supplement the income tax with a new tax system like a
> VAT are based on a primary policy of economic neutrality that
> adversely affects the government's ability to affect social change.
> Increased reliance on these types of tax systems will have a negative
> impact on the provision of housing and other socially desirable
> activities. NAHB believes that the tax system should be structured to
> allow the government to influence social change and socially desirable
> activities.
>
> Adding a second tax system to the income tax inherently, and
> unnecessarily, complicates the tax structure well beyond the current
> mechanism. There are a variety of ways that the income tax can be
> reformed to accomplish any policy objective, such as increasing
> national savings using pension plans, IRAs, and the various tax rules
> regarding capital assets, that has been offered to justify the
> addition of another type of tax.
>
> The President's directive of having the Panel recommend revenue
> neutral tax reform proposals should not be avoided by proposing an
> illusory revenue neutral reform that is designed to provide a method
> of easily raising taxes in the future. Such an intention has been
> openly admitted by the advocates of adding a VAT to the current income
> tax in their testimony before the Panel. The Panel should reject this
> approach to reform.
>
> [Replacing the Income Tax]{.underline}. NAHB is opposed to replacing
> the income tax with any of the tax reform proposals that have been
> suggested to the Panel. These replacement taxes include a VAT, NRST,
> flat tax, and national consumption tax. These tax systems: 1) are
> regressive and excessively difficult to administer when modified to
> offset their regressive nature (e.g., through refunds, elimination of
> some items from tax, etc.); 2) reduce the government's ability to
> effect social change and provide incentives for socially desirable
> activities; 3) would create a one-time transfer of wealth to current
> owners of homes, cars and other substantial durables, because their
> value will increase as the replacements (i.e., new items) have a tax
> added to their costs; 4) involve substantial the tax rates, especially
> if essentials are exempted in order to reduce regressivity; and 5)
> create greater potential for an underground economy to avoid the tax.
> The faults of these systems would require ongoing changes over many
> years to adjust for systemic shortcomings. The likely outcome of
> completely replacing the income tax would be serious economic
> disruptions, which could be difficult to ameliorate, even over an
> extended period of time.
>
> It would be unnecessarily difficult, if not impossible, to follow the
> President's directive to preserve the incentives for homeownership in
> any of these systems. Each of these types of taxes does not provide
> for homeownership incentives in their conceptual framework. Their
> basic structure, in fact, would negate all homeownership incentives.
>
> For instance, under a NRST, the purchase of a new home would be taxed
> at the federal retail tax rate, while all subsequent sales of that
> home would be tax-free. This system would raise the cost of newly
> constructed homes, making new home construction less affordable and
> less attractive to prospective homebuyers. This serves the purpose of
> damping the demand for new construction, reducing the replacement of
> older housing and increasing the age of the existing housing stock.
> Further, a NRST would increase the cost of existing homes. The price
> of an existing home, when compared to an identical, newly constructed
> home, would rise to match the post-tax cost of the new home, thereby
> making the home less affordable and granting the existing homeowner an
> one-time transfer of wealth. Further, any mechanism created to apply
> the tax to existing items of property would be far too complex to be
> administrable.
>
> Replacing the income tax with any of the proposed tax systems, e.g. a
> VAT, NRST, flat tax or consumption tax, runs the unacceptable risk of
> serious economic disruption to the economy and the well being of the
> American people. It would be far too speculative to try to determine
> the impact of a new type of tax on different types of assets and
> activities, such as home values, employment in different sectors of
> the economy, equipment and commercial real estate. The complications
> of a rational and equitable transition from one system to another
> would be excessive even if the transition impacts could be determined
> with some degree of confidence.
>
> [Conclusion]{.underline}. NAHB compliments the Panel on the process it
> has followed in carrying out the President's charge to develop tax
> reform proposals that preserve housing incentives. NAHB has attended
> every hearing of the Panel and submitted comments on each set of
> issues raised by the Panel. Hearing each of the witnesses that
> presented testimony to the Panel was instrumental in assisting NAHB in
> developing our comments on their proposals. [The testimony only serves
> to cement NAHB's strong belief that the retention of an income tax,
> with modifications to preserve and strengthen homeownership
> opportunities and decrease complexity, is the best means to tax
> reform.]{.underline}