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TAX REFORM AND RESIDENTIAL REAL ESTATE 

HEARING 

BEFORE THE

COMMITTEE ON WAYS AND MEANS 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED THIRTEENTH CONGRESS 

FIRST SESSION 

APRIL 25, 2013 

Serial No. 113–FC06 

Printed for the use of the Committee on Ways and Means 

( 


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COMMITTEE ON WAYS AND MEANS 

DAVE CAMP, Michigan, Chairman 

SAM JOHNSON, Texas 

KEVIN BRADY, Texas 

PAUL RYAN, Wisconsin 

DEVIN NUNES, California 

PATRICK J. TIBERI, Ohio 

DAVID G. REICHERT, Washington 

CHARLES W. BOUSTANY, JR., Louisiana 

PETER J. ROSKAM, Illinois 

JIM GERLACH, Pennsylvania 

TOM PRICE, Georgia 

VERN BUCHANAN, Florida 

ADRIAN SMITH, Nebraska 

AARON SCHOCK, Illinois 

LYNN JENKINS, Kansas 

ERIK PAULSEN, Minnesota 

KENNY MARCHANT, Texas 

DIANE BLACK, Tennessee 

TOM REED, New York 

TODD YOUNG, Indiana 

MIKE KELLY, Pennsylvania 

TIM GRIFFIN, Arkansas 

JIM RENACCI, Ohio 

SANDER M. LEVIN, Michigan 

CHARLES B. RANGEL, New York 

JIM MCDERMOTT, Washington 

JOHN LEWIS, Georgia 

RICHARD E. NEAL, Massachusetts 

XAVIER BECERRA, California 

LLOYD DOGGETT, Texas 

MIKE THOMPSON, California 

JOHN B. LARSON, Connecticut 

EARL BLUMENAUER, Oregon 

RON KIND, Wisconsin 

BILL PASCRELL, JR., New Jersey 

JOSEPH CROWLEY, New York 

ALLYSON SCHWARTZ, Pennsylvania 

DANNY DAVIS, Illinois 

LINDA SA ́ NCHEZ, California 

JENNIFER M. SAFAVIAN, Staff Director and General Counsel 

JANICE MAYS, Minority Chief Counsel 


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C O N T E N T S 

Page 

Advisory of April 25, 2013 announcing the hearing ............................................. 2 

WITNESSES 

Mark A. Calabria, Ph.D., Director of Financial Regulation Studies, Cato Institute, Washington, DC .......................................................................................... 45 

Robert Dietz, Assistant Vice President for Tax and Policy Issues, National 

Association of Home Builders, Washington, DC ................................................ 125 

Mark Fleming, Ph.D., Chief Economist, CoreLogic, McLean, VA ....................... 6 

Jane G. Gravelle, Senior Specialist in Economic Policy, Congressional Research Service, Washington, DC ......................................................................... 33 

Thomas F. Moran, Chairman and Managing Partner, Moran & Company, 

Chicago, IL, on behalf of the National Multi Housing Council and the 

National Apartment Association ......................................................................... 161 

Robert Moss, Senior Vice President, Boston Capital, Boston, MA, on behalf 

of the Housing Advisory Group ........................................................................... 174 

Phillip L. Swagel, Professor of International Economic Policy, University of 

Maryland School of Public Policy, College Park, MD ........................................ 64 

Gary Thomas, President, National Association of Realtors, Washington, DC ... 103 

Eric J. Toder, Institute Fellow, Urban Institute, and Co-Director, UrbanBrookings Tax Policy Center, Washington, DC ................................................. 12 


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(1) 

TAX REFORM AND RESIDENTIAL REAL ESTATE 

THURSDAY, APRIL 25, 2013 

U.S. HOUSE OF REPRESENTATIVES, 

COMMITTEE ON WAYS AND MEANS, 

Washington, DC. 

The Committee met, pursuant to call, at 9:38 a.m., in Room 

1100, Longworth House Office Building, Hon. Dave Camp [Chairman of the Committee] presiding. 

[The advisory announcing the hearing follows:] 


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ADVISORY 

FROM THE COMMITTEE ON WAYS AND MEANS 

FOR IMMEDIATE RELEASE CONTACT: (202) 225–3625 

Thursday, April 18, 2013 

No. FC–06 

Camp Announces Hearing on 

Tax Reform and Residential Real Estate 

Congressman Dave Camp (R–MI), Chairman of the Committee on Ways and 

Means, today announced that the Committee will hold a hearing on Federal tax provisions that affect residential real estate as part of the Committee’s continued work 

on comprehensive tax reform. The hearing will take place on Thursday, April 

25, 2013, in Room 1100 of the Longworth House Office Building, beginning 

at 9:30 a.m. 

In view of the limited time available to hear witnesses, oral testimony at this 

hearing will be from invited witnesses only. However, any individual or organization 

not scheduled for an oral appearance may submit a written statement for consideration by the Committee and for inclusion in the printed record of the hearing. 

BACKGROUND: 

A number of different Federal tax provisions directly affect residential real estate 

and the housing sector. The mortgage interest deduction and the deduction for State 

and local real property taxes are available to the roughly one-third of taxpayers who 

itemize their deductions, but not to the roughly two-thirds of taxpayers who instead 

take the standard deduction. For some taxpayers, however, these deductions are reduced by the recently reinstated ‘‘Pease’’ limitation on itemized deductions, and the 

real property tax deduction is completely disallowed for taxpayers subject to the Alternative Minimum Tax (AMT). Other significant housing-related tax provisions include the exclusion of gain on the sale of a principal residence, the low-income housing tax credit, the temporary exclusion from income of cancellation of mortgage 

debt, and numerous other provisions. 

In announcing this hearing, Chairman Camp said, ‘‘As we continue to work toward comprehensive tax reform that makes the Code simpler and fairer so 

that more jobs with better pay are created, it is important to do a top to 

bottom review of the Code. Home ownership is an integral part of the 

American dream, and the Tax Code has long provided a variety of incentives to make it easier for families to buy and own a home. Before considering any proposal, the Committee must better understand how tax reform 

might affect the housing sector and this hearing is an opportunity to hear 

directly from both academic experts and industry stakeholders.’’ 

FOCUS OF THE HEARING: 

The hearing will consider how certain Federal tax provisions affect the housing 

sector and home ownership—and the benefits of such investment. It will explore 

how tax policy affects the relative level of investment between residential real estate 

and other parts of the economy (such as business investment). 

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS: 

Please Note: Any person(s) and/or organization(s) wishing to submit written comments for the hearing record must follow the appropriate link on the hearing page 

of the Committee website and complete the informational forms. From the Committee homepage, http://waysandmeans.house.gov, select ‘‘Hearings.’’ Select the hearVerDate Sep 11 2014 09:01 Jan 26, 2017 Jkt 021124 PO 00000 Frm 00006 Fmt 6633 Sfmt 6621 I:\WAYS\WAYSPS\21124\21124.XXX 21124

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ing for which you would like to submit, and click on the link entitled, ‘‘Click here 

to provide a submission for the record.’’ Once you have followed the online instructions, submit all requested information. ATTACH your submission as a Word document, in compliance with the formatting requirements listed below, by the close 

of business on Thursday, May 9, 2013. Finally, please note that due to the 

change in House mail policy, the U.S. Capitol Police will refuse sealed-package deliveries to all House Office Buildings. For questions, or if you encounter technical 

problems, please call (202) 225–3625 or (202) 225–2610. 

FORMATTING REQUIREMENTS: 

The Committee relies on electronic submissions for printing the official hearing record. As always, submissions will be included in the record according to the discretion of the Committee. 

The Committee will not alter the content of your submission, but we reserve the right to format 

it according to our guidelines. Any submission provided to the Committee by a witness, any supplementary materials submitted for the printed record, and any written comments in response 

to a request for written comments must conform to the guidelines listed below. Any submission 

or supplementary item not in compliance with these guidelines will not be printed, but will be 

maintained in the Committee files for review and use by the Committee. 

1. All submissions and supplementary materials must be provided in Word format and MUST 

NOT exceed a total of 10 pages, including attachments. Witnesses and submitters are advised 

that the Committee relies on electronic submissions for printing the official hearing record. 

2. Copies of whole documents submitted as exhibit material will not be accepted for printing. 

Instead, exhibit material should be referenced and quoted or paraphrased. All exhibit material 

not meeting these specifications will be maintained in the Committee files for review and use 

by the Committee. 

3. All submissions must include a list of all clients, persons and/or organizations on whose 

behalf the witness appears. A supplemental sheet must accompany each submission listing the 

name, company, address, telephone, and fax numbers of each witness. 

The Committee seeks to make its facilities accessible to persons with disabilities. 

If you are in need of special accommodations, please call 202–225–1721 or 202–226– 

3411 TDD/TTY in advance of the event (four business days notice is requested). 

Questions with regard to special accommodation needs in general (including availability of Committee materials in alternative formats) may be directed to the Committee as noted above. 

Note: All Committee advisories and news releases are available on the World 

Wide Web at: http://www.waysandmeans.house.gov

f 

/. 

Chairman CAMP. Good morning. The Committee will come to 

order. 

Good morning and thank you for joining us today as we continue 

our dialogue with individuals, families, and job creators of all sizes 

about the critical steps that Congress can take through tax reform 

to get our economy back on solid footing. 

My position is well known: It is important for Congress to fix our 

broken Tax Code. As anyone in this room who just completed their 

taxes in the last few weeks will tell you, today’s Tax Code is far 

too complex, it takes far too much time and too much money to 

comply with. And while I often joke that the Code is more than 10 

times the size of the Bible with none of the good news, what I 

should also add is that not everything in the Code is bad. However, 

with more than 4,000 changes made to the Tax Code in the last 

decade alone, more than one per day, it is tough to imagine that 

all those changes have made the Code more user friendly. It is just 

the opposite. And that is why we owe it to the American people to 

go line by line through the Code to see how we can make it work 

better for hard-working taxpayers, not just those who can afford a 

good accountant. 


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The two primary keys to tax reform are to make the Tax Code 

simpler, fairer, and more transparent for families and employers, 

and to strengthen the economy so that we can create more jobs and 

increase wages for American families. 

So today, as part of our top-to-bottom review of the Code, we will 

examine how tax policy related to residential real estate lines up 

with those goals, and we will do so with two questions in mind. 

Does current tax policy help American families and does it make 

our economy stronger? 

Home ownership is an integral part of the American dream, and 

the Tax Code has long provided a variety of incentives to make it 

easier for families to buy and own a home. We also know that the 

real estate industry plays a large role in our economy. So this is 

an area that needs careful, thoughtful review. 

A number of Federal tax preferences provide for benefits for residential real estate. While some are very familiar, others are lesser 

known. Although these provisions all pertain to housing, each is 

governed by different rules and criteria. If we are looking to understand how complex, confusing and costly our Code can be, consider 

just a few of the following examples involving residential real estate. 

Perhaps the most well known tax provision affecting real estate 

is the mortgage interest deduction, which has specific rules and 

limitations. For instance, only taxpayers who itemize their deductions may deduct mortgage interest. Other interactions within the 

Tax Code can also limit the use of this provision. 

By way of example, the deduction for interest on home equity indebtedness is disallowed for purposes of the alternative minimum 

tax. Furthermore, Federal tax benefits for real estate treat homeowners differently than renters. A taxpayer who pays $1,000 per 

month to rent an apartment may not deduct that amount from income, but a taxpayer who pays mortgage interest of $1,000 may 

take a deduction if they itemize. 

Though these examples are from real estate provisions, this complexity plagues the entire Code and underscores one simple fact: 

The Tax Code is a mess. You shouldn’t need an army of lawyers 

and accountants to understand our Tax Code and it shouldn’t take 

American taxpayers over 6 billion hours and $168 billion every 

year to comply with the Code. We should get rid of the loopholes 

in the Code and make it more efficient and effective for hard-working taxpayers. 

However, as we get started today, let me emphasize that not 

every credit or deduction is a loophole. The largest investment most 

people have is their home. And as I noted earlier, policies like the 

home mortgage interest deduction have played a big role in home 

ownership. 

I also believe that tax reform, which can help us to create a 

stronger economy with higher paychecks, is one of the best ways 

we can help families struggling to save for college, save for retirement, or of particular interest to some on our second panel today, 

save for a downpayment on that first home. 

So I look forward to the testimony of both panels today and I 

hope that the witnesses will help this Committee better understand 

how we can balance the goal of that simpler and fairer Code with 


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the needs facing consumers in the residential marketplace. Both 

are important to American families, and your expertise and insight 

will be critical to all of us in meeting their needs. 

Thank you. 

I will now recognize the Ranking Member for his opening statement. 

Mr. LEVIN. Thank you, Mr. Chairman. Welcome to our panel. 

The topic before us is an important one. The Federal Government, through the Tax Code, has been involved in promoting home 

ownership for over a century. Let’s be clear: There are many egregious loopholes in the Tax Code, but the main provisions incentivizing home ownership are policies, not loopholes. 

The failure to differentiate which is which between policies and 

real loopholes has led to some facile proposals. Among them are 

proposals that begin without the mortgage interest or any other deductions, or proposals that simply pick a much lower tax rate than 

present law without any suggestions as to how to fill the trillions 

in lost revenue that would result. 

Such proposals have failed to take into account some basic facts, 

including the growing income gap, and they have failed to consider 

adequately whether policies are significant for a strong middle 

class or mainly for very wealthy families. According to the Joint 

Committee on Taxation, two-thirds, 70 percent of the benefit of the 

mortgage interest deduction goes to households earning less than 

$200,000 a year. Less than a third of the benefit, 30 percent, goes 

to those who make more than that. 

By comparison, the reduced rate for capital gains almost exclusively benefits the very wealthy. More than 70 percent of the benefit of that lower rate flows to people making more than $1 million 

a year, just 12 percent to those making less than $200,000. 

These tax policies deserve, indeed, serious consideration beyond 

the easy rhetoric about simply broadening the base and reducing 

rates. So I hope that today this hearing will be a step in the direction of this serious consideration. 

Thank you, Mr. Chairman. 

Chairman CAMP. Well, thank you, Mr. Levin. 

Now it is my pleasure to welcome our first panel of experts, all 

of whom bring a wealth of experience from a variety of perspectives. Their experience and insights will be very helpful as the 

Committee considers the impact of Federal tax reform on residential real estate. 

First, I would like to welcome Mark Fleming, the Chief Economist at CoreLogic. Mr. Fleming has over 15 years of experience in 

the mortgage and property analysis business. 

Second, we will hear from Eric Toder, Institute Fellow at the 

Urban Institute and Co-Director of the Urban-Brookings Tax Policy 

Center in Washington, D.C. Mr. Toder is a veteran of the Treasury 

Department, CBO, and the IRS. 

Third, we will hear from Jane Gravelle, Senior Specialist in Economic Policy and a long-time veteran of the Congressional Research Service. 

Fourth, we will hear from Mark Calabria, Director of Financial 

Regulation Studies at the Cato Institute, also in Washington, D.C. 

Mr. Calabria has had a broad career, spending time at HUD, the 


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National Association of Home Builders, the National Association of 

Realtors, and the Senate Banking Committee. 

Finally, we will hear from Phillip Swagel, Professor of International Economic Policy at the University of Maryland School of 

Public Policy in College Park. Mr. Swagel is a former Assistant 

Secretary for Economic Policy at the Treasury Department. 

And thank you all for being with us today. The Committee has 

received each of your written statements and they will be made 

part of the formal hearing record. Each of you will be recognized 

for your oral remarks for 5 minutes. 

And so, Mr. Fleming, we will begin with you. You have 5 minutes. Welcome. 

STATEMENT OF MARK FLEMING, PH.D., CHIEF ECONOMIST, 

CORELOGIC, MCLEAN, VA 

Mr. FLEMING. Thank you. Chairman Camp, Ranking Member 

Levin, and distinguished Members of the Committee on Ways and 

Means, CoreLogic appreciates the opportunity to submit this testimony regarding tax reform and residential real estate. 

My name is Mark Fleming, and I am Chief Economist for 

CoreLogic, a leading global provider of consumer, financial, and 

property information, analytics and services to businesses and government. Our company combines public, contributory, and proprietary data to develop predictive decision analytics and provide 

business services that bring dynamic insights to our customers in 

the residential mortgage origination, securitization, and servicing 

markets, as well as other private sector institutions and government. 

One of the brightest spots within the uneven economic recovery 

at the moment is the housing sector. Residential investment contributed about half a percentage point to GDP growth in Q4 of 

2012, very significant for a single industrial sector. In March of 

2013, residential investment continued to grow. Housing starts increased to an annualized rate of 1 million, which is 47 percent 

above the level for the same month a year earlier and the largest 

increase in more than 20 years. Home prices consequently have 

rose 10.2 percent year-over-year, the largest increase in nearly 7 

years, and our pending house price index indicates that price 

growth in March will continue the trend. 

One of the features of the American Recovery and Reinvestment 

Act of 2009 was a first-time home buyer tax credit aimed at stimulating the real estate sales market. In the first half of 2009, before 

the impact of the tax credit could be felt, home sales were declining 

at a rate of 15 percent from the prior year. However, by September 

of 2009, sales were at the same level as the prior year, and by November 2009, the month of expiration, sales were up 34 percent 

from the prior year, nearly a 50 percentage point improvement in 

under 1 year. 

When the tax credit was extended to April of 2010, sales increased at an average rate of 12 percent annualized until expiration of the credit. However, as soon as the tax credit expired, the 

volume of home sales dropped, averaging a rate of 18 percent 

annualized for the remainder of the year. Furthermore, prior to the 

expiration of the tax credit, expensive home sales increased more 


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rapidly than low and moderately priced home sales. The tax credit 

stimulated current demand at the expense of future demand, but 

did not have a permanent impact on the market. 

While the first-time home buyer tax credit resulted in home buyers buying sooner than otherwise, the Tax Relief Act of 1997 causes 

a subset of sellers to defer sales to a later date. The Tax Relief Act 

exempts from taxation the profits on the sale of a residence of up 

to $500,000 for married couples filing jointly and $250,000 for singles if the property has been a principal residence in 2 of the last 

5 years. 

Since the Act’s tax exclusion can only be applied if the owner has 

been living in the property for at least 2 years, it clearly applies 

to existing homes and not new homes. Therefore, the law only impacts existing home sales, but not new sales. For the 5 years prior 

to 1997, the existing home sales share of total sales, new and existing combined, averaged 84 percent. However, as discussion of the 

Act became public, the share declined to below 83 percent as sellers 

waited for the law to be enacted, so as to take advantage of the 

tax exclusion. After the law was enacted, the share rose above the 

previous average for several months, before returning to its longterm average. In the case of the first-time home buyer tax credit 

and the capital gains tax exclusion, market participants changed 

their behavior in the short term. 

The existing literature on the societal value of home ownership 

generally shows that, relative to renting, home ownership is associated with better-cared-for homes, increased participation in the 

community, and better students with lower likelihood of needing 

welfare. Assuming that increasing home ownership to capture 

these social benefits is a goal of tax policy, there is a significant 

amount of economic literature that studies existing and proposed 

policies and their implications for the decision to own versus rent, 

the amount of house consumed, and the implications of policy 

changes on house prices. 

CoreLogic is thankful to the Committee for the opportunity to 

provide testimony on the meaningful impact that tax policy has on 

participants in the real estate market. We are encouraged by the 

Committee’s recognition of how data and analytics can help inform 

a better understanding of the relationship between tax policies and 

the real estate market, especially as the housing market once again 

contributes to our fragile economic recovery. Thank you. 

[The prepared statement of Mr. Fleming follows:] 


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Chairman CAMP. Well, thank you, Mr. Fleming. 

Mr. Toder, you are recognized for 5 minutes. 

STATEMENT OF ERIC J. TODER, INSTITUTE FELLOW, URBAN 

INSTITUTE, AND CO-DIRECTOR, URBAN-BROOKINGS TAX 

POLICY CENTER, WASHINGTON, DC 

Mr. TODER. Thank you very much. 

Chairman Camp, Ranking Member Levin, and Members of the 

Committee, thank you for inviting me to testify today on reforming 

the mortgage interest deduction. My statement represents my 

views alone and should not be attributed to the Tax Policy Center 

or to the Urban Institute, its trustees, or its funders. 

The mortgage interest deduction is one of the largest individual 

tax preferences in the Internal Revenue Code. The Joint Tax Committee estimates it will cost $380 billion between 2013 and 2017. 

The Tax Policy Center estimates that about 40 million taxpayers 

will benefit from the deduction in 2015. 

The current mortgage interest deduction does little to promote 

home ownership because it provides no subsidy to taxpayers who 

do not itemize deductions and only a very modest subsidy to taxpayers in the 15 percent bracket. The subsidy value is largest for 

families in high tax brackets, who are the ones most likely to own 

a home without a subsidy. Other countries without a mortgage interest deduction have home ownership rates as high or higher than 

the United States. Instead, the deduction mostly encourages homeowners to buy larger and more expensive homes with borrowed 

money. 

Either a uniform percentage tax credit for mortgage interest or 

an investment credit for first-time home purchase would be a more 

effective home ownership subsidy. Replacing the deduction with an 

interest credit has been endorsed by the President’s Advisory Panel 

on Federal Tax Reform appointed in 2005 by President Bush, the 

National Commission on Fiscal Responsibility and Reform, and the 

Debt Reduction Task Force of the Bipartisan Policy Center. Other 

proposed reforms include reducing the size of a mortgage qualifying 

for a subsidy, limiting the subsidy to a principal residence, and 

eliminating the subsidy for home equity. 

The tables in my testimony display the effects on tax burdens 

and average tax rates of four potential reforms: Eliminating the deduction, limiting it to interest on the first $500,000 of home acquisition debt, replacing it with a 15 percent refundable credit on the 

first $25,000 of eligible interest, and replacing it with a 20 percent 

nonrefundable credit for interest on the first $500,000 of home acquisition debt. All of these options would raise taxes the most on 

upper-middle-income taxpayers, and replacing the deduction with a 

credit would reduce tax burdens on average in all groups in the 

bottom 80 percent of the income distribution. 

The revenue gains, I should note, from all these options would 

be lower if introduced as part of a reform that lowered marginal 

income tax rates. With lower rates, eliminating deductions raises 

less money, but new credits would cost just as much. 

Proposals to pare back the mortgage interest deduction could adversely affect housing prices. Reform should be introduced slowly 


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to avoid risks to the housing market, but transition rules would reduce revenue gains from the options and delay their benefits. 

In conclusion, the mortgage interest deduction is difficult to justify on policy grounds. It does little to encourage home ownership, 

but instead mostly encourages upper-middle-income households to 

buy larger and more expensive homes. Converting the deduction to 

a credit, placing additional limits on the amount of debt eligible for 

the subsidy, and denying the preference to home equity loans and 

second homes would result in a larger home ownership subsidy to 

those who might act on it at a lower fiscal cost. 

But any reform undertaken must take account of short-run adverse effects on housing markets. Designing appropriate transition 

rules that prevent market disruption, while retaining the benefits 

of removing or redirecting the preference, will be challenging. 

Thank you very much. 

[The prepared statement of Mr. Toder follows:] 


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Chairman CAMP. Thank you very much, Mr. Toder. 

Ms. Gravelle, you are recognized for 5 minutes. 

STATEMENT OF JANE G. GRAVELLE, SENIOR SPECIALIST IN 

ECONOMIC POLICY, CONGRESSIONAL RESEARCH SERVICE, 

WASHINGTON, DC 

Ms. GRAVELLE. Thank you. 

Since the interest in housing tax expenditures is part of a general investigation of broadening the income tax base to either permit a lower rate or to prevent rates from rising, I would like to 

begin first with some general comments on tax reform, based on a 

CRS report that we did last summer. 

First, it is very difficult to identify base-broadening provisions in 

general that might allow significant rate reductions. About 30 percent of tax expenditures relate to savings incentives, such as retirement savings, exempting capital gains at death, and lower rates on 

capital gains and dividends, which some who are concerned about 

saving would probably like to retain. Others are unlikely candidates for technical reasons or because they are crucial to low-income individuals or because of particular merits or popularity and 

broad use. Our analysis suggested very limited possibilities for rate 

reduction. 

It is even more difficult to identify provisions that would allow 

significant reductions of the top rate while maintaining the current 

distribution of tax benefits. About 70 percent of the revisions we 

identified as being significant at the top, again, were related to savings. 

Finally, if the goal of lowering tax rates is to encourage supplyside responses, base broadening increases effective marginal tax 

rates in the same way as statutory rate increases, because if part 

of an additional dollar of income is devoted to a tax-deductible use, 

eliminating that deduction will raise the share of taxes paid at the 

margin. For example, eliminating all itemized deductions, we estimated, would allow a statutory rate reduction of the top between 

4 and 5 percentage points, but the loss of deductions themselves 

would increase the effective marginal tax rate by about 4.5 percentage points, essentially leaving effective marginal rates unchanged. 

How do the primary provisions affecting housing, mortgage interest deductions, property tax deductions, and exclusions of capital 

gain fit into this framework? First, although their broad use and 

popularity may be political barriers to major revisions, many economists have criticized these provisions as distorting the allocation of 

resources, diverting capital from other uses, encouraging the overconsumption of housing, and treating renters differently from 

owner occupants. There may, however, be merits to owner-occupied 

housing, such as the neighborhood benefits that have already been 

mentioned. 

Perhaps more importantly, a home is an important asset in retirement. Since investment in a home is a form of automatic savings, accumulating equity as the mortgage is paid, that saving may 

be in part an increase rather than a substitute for other savings. 

If a goal of tax reform is to encourage saving, these subsidies may 

be justified. 


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Finally, in terms of fairness, mortgage interest deductions increase fairness between homeowners who rely largely on mortgages 

and those who finance out of assets. 

There are some additional justifications for retaining the capital 

gains exclusion. Capital gains taxes on home sales discourage labor 

mobility by increasing the cost of relocating. They cause real lockin effects, such as discouraging older individuals from scaling down 

their homes as their families become smaller or moving to rental 

housing, since taxpayers can avoid tax on the gain by holding their 

home until death. They impose taxes on certainly elderly individuals, who are forced to sell, for example, for health reasons, and 

not on others. And the lock-in effect, about which we know very little, may significantly reduce the potential revenue gain. 

Transition issues also arise for individuals who have recently acquired large mortgages, and there are also immediate concerns on 

the housing demand, because the economy and the housing market 

are still very fragile. And transition rules, as long as you know 

they are happening, might not do much on that demand, for preventing a reduction in that demand. 

Now, looking at distribution, these housing provisions are not 

that important relative to income for taxpayers facing the top marginal tax rates, and so they would do very little to permit those 

rate reductions. Also, high-income taxpayers could avoid the effects 

by paying off their mortgages. 

The same sort of marginal effects on effective tax rates and supply-side responses with the loss of deductions raising effective marginal tax rates and offsetting statutory rate reductions would also 

occur with these provisions, but they would take a little longer and, 

most importantly, they would be focused on the sort of middle-class 

or upper-middle-class taxpayers generally with incomes between 

$100,000 and $250,000. Thank you. 

[The prepared statement of Ms. Gravelle follows:] 


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Chairman CAMP. All right. Thank you very much, Ms. Gravelle. 

Mr. Calabria, you are recognized for 5 minutes. 

STATEMENT OF MARK A. CALABRIA, PH.D., DIRECTOR OF FINANCIAL REGULATION STUDIES, CATO INSTITUTE, WASHINGTON, DC 

Mr. CALABRIA. Chairman Camp, Ranking Member Levin, other 

distinguished Members of the Committee, I thank you for the invitation to appear at today’s hearing. 

Let me first say that I believe housing is a critical component of 

our economy. More importantly, I think we need to keep in mind 

that housing is one of the basic necessities of life. Without stable, 

decent, and affordable housing, many other goals in life become 

quite difficult, if not impossible to achieve. 

With that in mind, it is my opinion that our current Tax Code 

actually does little to help achieve these goals. I believe a Tax Code 

that would improve economic growth and housing affordability 

would ultimately be a Code with low, simple, flat rates, with few, 

if any, deductions. Accordingly, I would urge the Committee, as an 

ultimate objective, to entirely eliminate the mortgage interest deduction and the deduction for local property taxes. I would also encourage the Committee do so in a budget-neutral manner, lowering 

overall rates. 

As households have made significant investments and decisions 

based upon the current Tax Code, such a change should, of course, 

be phased in over a reasonable number of years. I would suggest 

no more than 7. I recognize that such a change immediately raises 

questions as to any adverse impact. I would be the first to agree 

that no policy is without both costs and benefits. There are no 

freebies. Before we can properly assess those costs and benefits, 

however, we must start from a position of understanding. 

As it relates to the mortgage interest deduction, we can think 

about, or at least I think about homeowners as broken down into 

roughly three near-equal-size groups. The first third is homeowners 

who have no mortgage at all. That is about a third of owners who 

own their homes free and clear, deriving no benefit from the mortgage interest deduction. I will note as an aside, prior to 1960, the 

majority of homeowners actually owned their homes free and clear 

without any mortgage at all. The second third have mortgages that 

are simply too small for these households to benefit from itemizing 

as opposed to taking the standard deduction. The last third are 

those who would potentially benefit from the mortgage interest deduction. These households also tend to be the most highly leveraged and the highest income households. 

The good news, in my opinion, from a transition is that those 

who currently benefit from the mortgage interest deduction are 

also those most likely to be homeowners with or without the mortgage interest deduction. I think the academic evidence is very clear 

that the mortgage interest deduction does almost nothing to increase home ownership rates. I have included in my written testimony a chart showing that changes over time in the value of the 

deduction have not been correlated with changes in the home ownership rate. 


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We should also recognize that some portion of the subsidy behind 

the mortgage interest deduction is captured by lenders in the form 

of higher rates. This subsidy also differs dramatically across housing markets. In tighter markets, such as in San Francisco, the 

buyer gets almost no value from the subsidy, as it ends up being 

almost entirely captured by the seller. In looser markets there is 

very little price impact, as the buyer retains the majority of that 

subsidy. 

I would also argue that any price declines that result from the 

removal of the mortgage interest deduction would largely occur in 

markets where we would want housing prices to fall, in my opinion. Again, you look at San Francisco. The median house price is 

almost eight times median income. It is a simply unaffordable place 

to live by any stretch of the imagination. 

The Committee should also keep in mind that the value of the 

mortgage interest deduction increases with the level of interest 

rates outstanding in the economy. Quite simply, the higher our interest rates, the higher the value of the mortgage interest deduction. This also implies that the higher mortgage interest rates are 

the greater the impact of the mortgage interest deduction on house 

prices, to the extent that they are capitalized into house prices. 

Obviously the converse of that holds. The lower the rates are, the 

lower the value of the mortgage interest deduction and thus the 

lower the house price impact. So if we wish to minimize the impact 

of reducing or eliminating the mortgage interest deduction, then all 

else equal, we should do so at a time when interest rates are at 

their lowest. I would submit to you that it is pretty hard for me 

to believe that rates are getting lower than they are today. So if 

there is a time to eliminate or change the mortgage interest deduction, the optimal time would be now. 

We should not, of course, forget that rental properties enjoy 

many of the tax benefits that owner-occupied properties also get. 

Mortgage interest property taxes can all be expensed. The true advantage that the Tax Code offers to homeowners over renters is 

that rental income is taxed, whereas imputed rent that owners pay 

to themselves is not taxed. Economists have estimated that the 

value of this non-imputed taxation of owners’ imputed rent is about 

twice the aggregate size of the mortgage interest deduction. 

While a handful of countries do tax imputed rent, I believe a 

much fairer and simpler system for achieving tenure neutrality in 

the Code would be to end the taxation of rental income. My backof-the-envelope calculation is that such would score about $6 billion 

annually. 

Let me wrap up by emphasizing that extremely high levels of leverage on the part of households and financial institutions was a 

direct contributor to the recent financial crisis. As the mortgage interest deduction is less a subsidy for home ownership than a subsidy for home debt, its existence, while not a major driver of the 

crisis, was a contributor. Reducing household leverage would improve the stability of our financial system and our economy. 

Thank you, and I look forward to your questions. 

[The prepared statement of Mr. Calabria follows:] 


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Chairman CAMP. Thank you very much, Mr. Calabria. 

Mr. Swagel, you are recognized for 5 minutes. 

STATEMENT OF PHILLIP L. SWAGEL, PROFESSOR OF INTERNATIONAL ECONOMIC POLICY, UNIVERSITY OF MARYLAND 

SCHOOL OF PUBLIC POLICY, COLLEGE PARK, MD 

Mr. SWAGEL. Thank you. Thank you, Chairman Camp, Ranking 

Member Levin, and the Members of the Committee for the opportunity to testify. 

In the immediate aftermath of the financial crisis, I think it was 

understandable for housing market participants and for the housing industry to urge that policymakers ‘‘do no harm to housing’’ or 

‘‘make no changes.’’ I think that time has passed. Housing is in recovery and cannot be left on the sidelines of tax reform. Instead, 

housing must be part of a thoughtful tax reform that boosts 

growth, simplifies the tax system, and maintains progressivity. 

Even more, the stronger sustained rate of U.S. economic growth 

from reform will be an important long-term positive for housing. 

So I would urge that changes to the tax treatment of housing be 

made as part of an overall pro-growth tax reform and not as an ad 

hoc revenue grab to support higher spending, as unfortunately is 

the case in the Administration’s budget proposal. 

Other developments will affect housing at the same time as reform, including the normalization of interest rates by the Fed, perhaps progress on housing finance reform, and other things. 

On the other hand, affordability remains very high with low interest rates, and the housing sector is at the beginning of a time 

of recovery. So even if tax reform whittles away some of the benefits that lead to a diversion of resources from other forms of investment, the housing sector and the housing recovery will continue 

going forward. 

So tax reform should address the incentives in the Code that lead 

Americans to purchase larger homes with more debt than otherwise and that distort the allocation of resources. This distortion reduces U.S. productivity growth and thereby reduces the growth of 

wages and income. 

As others have said, the benefits of the tax subsidies for housing 

accrue disproportionately to high-income families. Three out of four 

dollars of the tax benefits for housing go to families with incomes 

above the definition of the middle class put forward by President 

Obama’s chief economist. 

Housing plays an important role for American families, businesses, and the overall economy, and the Code reflects this important role. As discussed in my written testimony, reforms to the 

mortgage interest deduction can preserve the support for housing 

in the Code while boosting U.S. growth and improving measures of 

distribution. 

It is not very common in economics that policy changes can improve both efficiency and equity, and that is possible here, reflecting the considerable bias in the Tax Code. And as others have said, 

an appropriate transition period can be put in place to smooth the 

impact of tax reform on housing, but the key is really to focus the 

tax benefits more carefully. 


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One measure of the distortion in the economy implied by the tax 

subsidies for housing can be seen in a calculation of the effective 

tax rate for investment in different types of activities. So in 2007 

the Treasury Department calculated that the tax rate on an incremental dollar of investment in housing was 3.5 percent, where the 

tax rate on business investment, overall business investment, was 

25.5 percent. And since 2007, taxes on business investment have 

gone up, with higher taxes on dividends, capital gains, and higher 

taxes on the flow-through income of businesses. 

So it is vital to support housing, but it is also important to understand the disparity that the Tax Code presents between investment in housing and investment in other forms of activity, including business investment. 

The tax system also provides support for affordable housing. I 

would like to mention that very briefly in concluding. A key question that I think is worth further examination is whether the benefits that the Tax Code has for affordable housing are well targeted. 

In other words, do the dollars actually reach the people who most 

need help with affordable housing or do the benefits instead go to 

other parties, such as real estate developers? 

In general, a sound principle is for any tax subsidies to target 

people rather than places, and this suggests a focus on demandside tax subsidies for affordable housing, such as the Housing 

Choice Voucher, the so-called Section 8 program. 

In contrast, the Low Income Housing Tax Credit has the potential to boost construction of affordable housing units. I think it 

would be useful for Congress and for the Committee to mandate 

careful empirical analysis—data, not anecdotes—to assess whether 

this is the case. And the idea is for tax policy to ensure that taxpayer resources be used in the most effective way to support the 

vital goal of affordable housing. Thank you very much. 

[The prepared statement of Mr. Swagel follows:] 


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Chairman CAMP. Well, thank you very much, Mr. Swagel. 

Thank you all for your testimony. We are now going to move into 

the question-and-answer phase of the hearing, and each Member 

who seeks recognition will be given 5 minutes in which to ask questions and receive answers. 

Let me start, and I will start with you, Mr. Swagel. I just want 

to go over a point you made in your testimony. I mean, clearly, over 

the last 21⁄2 years, this Committee has been engaged very heavily 

in tax reform. We have had over 20 hearings. We are determined 

to fix a Tax Code that many of us view as broken and really presents too much of a burden on taxpayers, it is too costly. 

You mentioned a pro-growth tax reform model that could help 

bring about general economic growth and job creation. And if that 

is the case, would that help the housing sector? 

Mr. SWAGEL. Oh, I think it would. Even if some of the benefits, 

such as the mortgage interest deduction, are reduced, the overall 

effect in boosting economic growth from reducing the tax on saving 

and the tax on investment in the U.S. Tax Code would boost the 

overall economy, and this would flow back into housing. It is hard 

to say, you know, that tax reform will pay for itself in the form of 

stronger growth, but there will definitely be a strong offset. 

Chairman CAMP. Mr. Calabria, do you have any comment on 

that? 

Mr. CALABRIA. I would agree. I think over time, ultimately in 

the long run, what should and what does drive house prices are incomes. And certainly I think one of the mistakes we made in the 

financial crisis was to try to get people to stretch above and beyond 

their means. And so to me, a pro-growth Tax Code is going to be 

one that increases labor productivity, increases wages, increases incomes, and makes housing more affordable by making people 

wealthier, not making them more indebted. 

Chairman CAMP. There has been some testimony, Mr. Toder, 

particularly yours, on the importance of transition rules with regard to any tax changes, or, you know, for the tax benefit regarding 

housing. Can you kind of elaborate a little bit more on that in 

terms of why transition rules are important? And do you have any 

recommendations on specifics of how transition rules should work? 

Mr. TODER. Okay. I wish I had thought about that a little bit 

more before throwing it out there. But part of the reason I did 

make that comment, there are studies out there which show fairly 

substantial effects on house prices of, for example, removing the 

mortgage interest deduction. 

They may not be as serious as those studies show. Interest rates 

are very low today. There are other people moving into the market 

who are not affected by the mortgage interest deduction. So I think 

they may be exaggerated, but nonetheless, we have had a very 

fragile housing market, as you know, and big losses. That has affected the construction industry, it has affected employment. And 

I think at this time, with the recovery a little fragile, you have to 

be a little bit careful about taking away those props. 

So whether this happens through gradually phasing out elimination of the deduction or grandfathering it for existing owners, 

there are a lot of different ways of doing this. 

Chairman CAMP. Sure. 


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Any thoughts on transition rules, Mr. Calabria or Mr. Swagel? 

Mr. SWAGEL. Sure. Transition rules are important, and one 

could imagine phasing in the reduction of the mortgage interest deduction. I wanted to mention, it is possible to go too far also. Imagine a transition rule that entirely excludes existing homes and 

says, you know, only new homes won’t have the mortgage interest 

reduction. Well, that will reduce the supply of new homes and 

could actually give a benefit to old homes. So anyone with an existing home could be better off. So the transition rules are really important. It is just as important to get that balance so that everyone 

is going to have to contribute something in tax reform. 

Chairman CAMP. Sure. Mr. Calabria. 

Mr. CALABRIA. Certainly there is a tradeoff, in my mind, between a reasonable phase-in, which I think is important—as I mentioned in my testimony, people have made investments based on 

this—versus simplicity. So I would, maybe to parse out something 

that Phil said, I would have the phase-in targeted to the person 

and the mortgage rather than the house. We know, for instance, 

historically the median life of a mortgage is about 7 years. So I 

think in this interest rate environment, it will probably be closer 

to 8 or 9, but having this, the mortgage you have today, or if you 

have it already on the books, remain deductible, you could have 

some sort of glide path where that diminishes over time, but with 

somewhat new mortgages coming on in the future. 

I will emphasize again the value of the deduction is related to 

the value of interest rates and the economy. And, again, they are 

not going to get any lower, they are only going to get higher. My 

point would be this will only get more difficult in the future, so 

doing it earlier rather than later. 

Chairman CAMP. All right. 

And, Mr. Fleming, any thoughts on this idea of pro-growth reform and sort of the idea of general economic growth and job creation, what that might mean in the housing sector? 

Mr. FLEMING. Yes. I agree with what has been said. You know, 

a better growing economy, particularly with broad-based income 

growth, is helpful to the housing market. That is how people buy 

homes. That is how house prices rise in the longer run. 

And this is a very sticky wicket in the sense of, with all the deductions and the transition rules, in that, for example, a lot of the 

studies we look at look at the user cost of comparing renting to 

owning. But a lot of people don’t just consider user costs. It is not 

a purely financial decision to buy a home, right? I mean, much as 

we economists like to believe that we act individually, financially, 

rationally, I don’t know that that is often the case, and that we 

don’t have a lot of other driving forces. And that is really what is 

behind this. 

If you incorporate user cost, which is where the tax policy is 

interacting and adjusting user costs to the benefit of home owning 

over renting, it is influential in the decision of tenure choice. You 

know, the studies have shown empirically it is influential, but it is 

not the only influential thing. Other things just as important are 

your overall income level. That is where the economy would flow 

in. What your marital status is, what your family size is. There are 

many other factors, as we know. 


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It also shows, and some of the best economic research I have 

seen are these models that sort of take those decisions into two 

parts, which is the choice to buy or rent, and then once you have 

made the choice to buy, then it is a question of how much. Now, 

it also shows that it influences the ‘‘how much’’ component. 

So the question, I think, always gets back to, what is our public 

policy goal? Is it simply to spur home ownership? Is it home ownership in combination with increased investment in housing, which 

is where it stands today? I mean, we need to start with what the 

public policy perspective and goal is in the very first place before 

we attempt to redesign and figure out how to do the transition. 

Chairman CAMP. Okay. Thank you. 

And I just want to note that in terms of tax expenditures, 40 percent of the base broadening in the 1986 Act did not involve tax expenditures. So tax expenditures are not the only way of base broadening in order to lower rates as we go forward. 

So with that, I would recognize Mr. Levin. 

Mr. LEVIN. Thank you. Welcome. I am glad we are having this 

discussion. 

You know, I think everybody favors economic growth. I do think 

we need to look at prior periods of economic growth when there 

was a dramatic increase of home ownership in this country and to 

take a look at the role that the mortgage interest deduction played. 

My guess is, if you go into a middle-class area like I represent, 

more or less, more than less, I think you would have testimony 

from people who bought their homes in the 1950s, 1960s, and 

1970s as to the importance of the mortgage interest deduction. 

And it is interesting, Mr. Calabria, I think you mentioned a third 

are without a mortgage. I think we need to know how many of the 

people in that third paid off their mortgage over the years, and not 

just say a third. 

I have this chart as to who uses the mortgage interest deduction. 

I think we need to take into account the President’s proposal relating to a cap of 28 percent. It would mostly affect those with income 

over $200,000. And it is interesting, of those with income between 

$100,000 and $200,000, it appears about two-thirds itemize and 

use the mortgage interest deduction. That is 14 million of 22-plus 

million. So we are talking about a major policy impact. And for 

those with income between $75,000 and $100,000, of the 16.5 million, over 6 million use the mortgage interest deduction. 

I think we need to be very careful. And when we talk that this 

is mostly a high-income deduction, that is sometimes said, it really 

challenges us to look at what we mean by high income, because I 

think people who are making between $50,000 and $200,000, most 

of them are comfortable, I don’t think they would call themselves 

high-income wage earners. 

So I would like to ask, Ms. Gravelle, you mention in your testimony that as to tax expenditures and their elimination, the 

tradeoff ‘‘may be more apparent than real when considering the 

supply-side effects, such as labor, supply and saving.’’ If you could 

elaborate on what you mean by that. 

Ms. GRAVELLE. Well, basically, if I am going to earn an extra 

dollar and, say, I am paying 5 percent of that, say in State and 

local income taxes to take a simple example, and get a deduction 


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for it, if I lose that deduction that is going to raise my effective 

marginal tax rate. 

Well, every tax expenditure, virtually, except those for very lowincome people, has those relationships to income. So if I spend an 

additional dollar and some tax-favored spending is part of that dollar, taking that away is no different from raising the statutory 

rate. It varies across the income classes, but what it means is that 

if you are thinking about trading up most base broadening for 

rates, you are not going to change the effective tax rate that affects 

labor supply or savings or entrepreneurship or whatever you are 

looking for. It is just not there in the works. 

And if you do dynamic scoring based on statutory tax rates, you 

will greatly exaggerate, probably greatly exaggerate any growth effects. In fact, there might not be any growth effects, depending on 

what kind of subsidy you are talking about. 

Mr. LEVIN. Okay. My time is almost up. I just want to say, I 

think, Mr. Swagel, it is true that the tax rate on investment is 

higher than on home ownership. I just think we need to be careful 

when we make those comparisons to take into account what home 

ownership has meant in this country. And we need to take a look 

at other countries which have had high rates of home ownership 

to see what the structures are there which perhaps encouraged 

home ownership. I think we need to be really careful when we 

make comparisons of any kind on this. 

Chairman CAMP. All right. Mr. Johnson is recognized for 5 minutes. 

Mr. JOHNSON. Thank you, Mr. Chairman. Thanks for holding 

this important hearing on tax reform and residential real estate. 

And also, Mr. Chairman, thank you for asking me to serve as Chair 

of the Real Estate Working Committee. I very much enjoyed working with the Vice Chair, the gentleman from New Jersey, Bill Pascrell, and we had our fill of meetings on real estate. 

So I don’t know if you guys can tell us any more than we have 

been hearing over the past 4 weeks or not, but I met with local 

homebuilders in my district, we met with them up here in Washington, we met with the realtors in both places. And I was once a 

homebuilder, so I understand the important role housing plays in 

our economy. At the meeting, one of the things I heard was that 

it would be more difficult for folks, especially first-time home buyers, to get a mortgage if the mortgage interest deduction was significantly cut back or eliminated entirely. 

Mr. Calabria, as someone who knows a thing or two about housing and who supports getting rid of the mortgage interest deduction, I would like to hear from you whether you think there is any 

truth to what I heard from the homebuilders, in that it would be 

more difficult for folks to qualify for mortgages if the deduction was 

cut back in some way or eliminated. 

Mr. CALABRIA. I think it depends on what you assume about 

house prices. And, you know, I think you will hear on the second 

panel, you have heard here that if we get rid of it, house prices will 

come down. And so I want to go to the point that the Ranking 

Member raised, which is I as a homeowner, if the choice given to 

me was would I like to pay a little bit less for that house or would 

I like to have the mortgage interest deduction and those two cases 


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leave me equal payments, I would rather pay less for the house, 

quite frankly. 

I think it is not going to be any harder, because prices will come 

down, which means people have to save less to buy that house. So, 

again, there are going to be price effects, but I think that is actually a plus, not a minus. 

Mr. JOHNSON. Well, as a builder, we never include that as part 

of our computation. You know, you build a house for X amount of 

dollars and you put the profit on there and you charge the people 

that price, and it doesn’t make any difference what the deduction 

is. 

Mr. CALABRIA. And I would certainly agree. As a builder or realtor, you have to take the market as a given, you know, because 

you don’t necessarily drive the market, but the overall interest deduction does drive the market to a degree. 

Mr. JOHNSON. Mr. Toder, your thoughts on that same question, 

please. 

Mr. TODER. Well, you know, from people I have talked to, and 

maybe someone else can contradict this, I am not aware of banks, 

and I have dealt with several lately, asking anybody what their tax 

situation is when they are applying for a loan. They want to know 

your wealth, your income, your assets, but whether you are benefitting and how much from the deduction is not something that ever 

gets on the form, so I am not quite sure how it—— 

Mr. JOHNSON. No. They want to know if you can afford the 

payments. 

Mr. TODER. Yeah. 

Mr. JOHNSON. Okay. Thank you. 

Mr. Calabria, later on we will be hearing from Gary Thomas, the 

President of the National Association of Realtors. And in his testimony, he argues that the tax system supports home ownership by 

making it more affordable. So is Mr. Thomas wrong here, or do you 

think the mortgage interest deduction inflates home prices? You 

have said it does, I guess. 

Mr. CALABRIA. I think the mortgage interest deduction inflates 

home prices by a degree. I also think it is important to parse out, 

you know, the mortgage interest deduction is a subsidy for debt, 

not home ownership. We can come up with a variety of ways. I 

would argue if we want to subsidize home ownership, we should be 

subsidizing home equity. Give households something to pass on, 

not debt. 

So, again, part of my objective here is not to change effective tax 

rates or not to change home ownership rates, but to change the 

amount of leverage and indebtedness we have in the system so that 

households have real wealth in that house, not just a big mortgage. 

Mr. JOHNSON. So in other words, you believe repealing the 

mortgage interest deduction would reduce home prices. How much 

do you think it would reduce them? 

Mr. CALABRIA. Let me first say, it depends on the markets. I 

think if you looked at someplace like Houston, where it is incredibly easy to build, there will be zero price impact. You look at 

someplace like San Francisco, and I think prices will come down 

something like 10 percent. So it really depends on how tight the 


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supply is in that market. You are not going to see a uniform impact. 

I would also add, it is my belief the prices will come down in 

markets that are, in my opinion, way overpriced as it is. So, again, 

there is not going to be an impact in most of Texas. 

Mr. JOHNSON. Yeah. I think I agree with you. 

Mr. Toder, do you care to comment on that? 

Mr. TODER. I agree. I think it is just very variable. I think probably there will be some impact immediately in all markets, because 

it is hard for housing to adjust immediately, but that will be very, 

very variable across markets. 

Chairman CAMP. All right. Thank you very much. 

Mr. Rangel is recognized. 

Mr. RANGEL. Thank you, Mr. Chairman, for calling these hearings. 

Ms. Gravelle, could you expand on the idea that if we reduce the 

top rate and broaden the base, that it could be a disadvantage to 

moderate and higher—it could be an advantage for the moderate— 

it could be an advantage for the higher income, but moderate and 

middle-income people could be adversely affected? 

Ms. GRAVELLE. Well, if you want to achieve some of the rate 

reductions at the top that have been talked about, like going to, 

say, 25 percent, it is very hard to see a way to do that through tax 

expenditures or even—there are not that many nontax expenditures you can think of for individuals, either. 

So if you lower those rates and then do tax reform, and it is revenue neutral, then you would have to raise the tax burden on the 

middle class or low-income people. You know, there are only so 

many pieces of this puzzle. So either you can’t lower those top rates 

with base broadening or people at higher incomes get a reduction 

in their tax burden and somebody else has to pay for it. 

Mr. RANGEL. Well, the theory that most of us use is that there 

are some preferential treatments that are given to individuals and 

corporations that if they ever had a reason for being, it no longer 

exists, and that the system is unfair, and that by eliminating what 

some call loopholes or others call unnecessary incentives, that this 

would give us the funds to reduce the rates without having a severe impact on the incentives that we talk about here. 

So one person’s loophole is another person’s incentive, but basically speaking, you are saying that you could not reduce the top 

rates to 25 percent, even eliminating the so-called loopholes, that 

it would adversely affect the moderate and middle income because 

we will be taking away from them tax benefits that they now 

enjoy? 

Ms. GRAVELLE. If you are willing to raise the tax on capital 

gains to ordinary rates and change the scoring for that, that the 

Joint Tax Committee does, without big behavioral responses, if you 

are willing to tax capital gains at death, if you are willing to tax 

defined benefit pension plans and 401(k)s, there are some things 

there. What I am saying is I think most of those things are things 

that the people are interested in trying to retain in a tax reform 

that will accommodate growth, they are not some of the things they 

want to do. So if you take those off the table you have very little 

left. 


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Mr. RANGEL. So basically what you are saying is that, politically, we would not be closing the so-called loopholes in order to 

raise the type of revenue that would be necessary to lower the top 

rates. 

Ms. GRAVELLE. Unless you are willing to go after those kinds 

of provisions. 

Mr. RANGEL. It’s just that, you know, every time we talk about 

closing loopholes we get support from the Republicans until we try 

to do it. Then they say we are raising taxes on those people that 

we thought was equity. And then we have some people out there 

saying that they don’t want any more revenue because more revenue means tax increases. 

We have to find what you have said, which is clear, that if you 

are going to close loopholes or bring equity to the system, somebody 

is going to get hurt. You can call it just treatment under the Code 

or you can say they have to pay more taxes. But your statement 

is based more on the political will to do what we have to do than 

the fact that we can raise the money if we had the will to do it. 

Ms. GRAVELLE. Well, it is not just political will. It is whether 

you think there are merits. I think there are a lot of difficulties in 

taxing capital gains at death, for example, or imputing incomes 

from defined pension plans. So we laid out all of those. Some of it 

is practical. Some of it is provisions of merit. Some of it is political. 

But it all looks to us very difficult to come up with the base broadening that you would need, particularly at the top. 

Mr. RANGEL. Thank you. 

Chairman CAMP. Thank you, Mr. Rangel. I certainly appreciate 

your comments but I think we will let the Committee have a try 

on how difficult this will be. 

Mr. RANGEL. That is all right. 

Chairman CAMP. Mr. Tiberi is recognized for 5 minutes. 

Mr. TIBERI. Thank you, Mr. Chairman. Mr. Calabria and Mr. 

Swagel, I found your testimony fascinating. I didn’t agree with it 

all, but found it fascinating. Mr. Calabria, I love your last name by 

the way. You make a great point that is not often made in your 

written testimony on page 3: It should be emphasized that the deductibility of mortgage interest and property taxes is not exclusively to homeowners, in that landlords can also expense these 

items as well as claim a depreciation allowance for rental properties. 

Here is the point. And I don’t think you realize you made this 

point. If I own rental property and my taxes go up, I increase rents. 

If you take this away—not you, we—if we take this away from an 

owner of rental property, you don’t think rents are going to go up? 

They are. I am not going to allow you to answer, because I have 

to tell you I own property and they are. They are going to go up. 

That wasn’t a question. That wasn’t a question. 

And so here is another point I wanted to make and then I will 

let you guys shout if we have any time left. Mr. Swagel, higher income households tend to purchase larger homes with greater home 

mortgage debt and thus receive larger tax subsidies. You forgot to 

mention the AMT. The more people, taxpayers, have deductions 

and credits, the more they have higher income, higher mortgage interest deduction, higher property taxes, higher deductions on their 


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return, the more likely they are going to be subject to the AMT. 

And I am painfully aware of that. 

So the other point that you both made was with respect to higher 

income. The data that I have in front of me from Joint Tax from 

2004 show that 75 percent of the mortgage interest deduction benefit was collected by those earning less than $200,000. And the majority of those earning less than $200,000 made less than $100,000. 

And I would argue—I don’t have the stats for this—the closer you 

are to $200,000, the more likely you are going to be subject to the 

AMT, which will, again, mean you are going to be paying more taxes. 

My final point deals with theory versus reality. As somebody on 

the street who was a realtor, I will tell you my bias. I was a realtor. Never once did I have a client say to me, Pat, I want to buy 

this house because I can get a higher mortgage interest deduction 

or I want to buy this house because the property taxes are higher. 

Actually, people wanted to go where property taxes were lower. 

Even if they were actually itemizing their deductions, they didn’t 

say, boy, I want to go pay more taxes so I can deduct more of my 

income. I have never seen that behavior as a realtor. 

One more point and then I would love to have maybe your 

thoughts, both of you, Mr. Swagel in particular, you mentioned the 

low-income housing tax credit. As a Republican I would argue if 

you look at all the housing policy that the Federal Government 

does, and unfortunately Mr. Camp doesn’t have jurisdiction over all 

of it. We only have jurisdiction over some of it. Whether it is at 

HUD, whether it is Section 8 housing—I’m very familiar with both 

programs—or whether it is the low-income housing tax credit, as 

someone who tilts to the right from your testimony, why wouldn’t 

we be encouraging public-private sector support? Maybe the 

amount is wrong, maybe the subsidy is wrong, but isn’t it a good 

thing to get the public and private sector working together, which 

is exactly what the low-income housing tax credit does? It gets the 

best of both worlds. It has the Federal Government involved. It has 

the private sector involved. It has nonprofits involved. 

In my community, I have to tell you, if you and I went to tour 

housing for low-income people in my community in central Ohio 

and you looked at HUD property and you looked at Section 8 property and you looked at low-income housing tax credit property, 

there is no comparison in terms of what is the best managed, the 

best utilized, the best housing for low-income individuals. 

And I take issue with the fact that we don’t have low-income 

housing. I can give you a property in my district on Livingston Avenue that has homeless veterans transitioning in their lives in property. They went literally from the streets into low-income housing 

tax credit property into the workforce. It is a fabulous, fabulous 

property. Go ahead. 

Mr. SWAGEL. I would say the goals of both the mortgage interest deduction and the low-income housing tax credit are laudable 

and I fully support the goals. The question, as I have written in 

my testimony, is the targeting. And it is an open question in the 

economics literature for the LIHTC how effective it is. Do the benefits of this taxpayer support, to what extent do they result in new 

units? 

Mr. TIBERI. Help us improve it. Help us improve it. 


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Mr. SWAGEL. That is exactly it. 

Chairman CAMP. The time has expired. Mr. McDermott is recognized. 

Mr. MCDERMOTT. Thank you, Mr. Chairman. Russell Long, the 

old Finance Chairman in the Senate, once said that tax policy is 

‘‘Don’t tax you, don’t tax me, tax the guy behind the tree.’’ I appreciate you having this hearing because I think we need to wake up 

the people because they are the people behind the tree in this one. 

And Ms. Gravelle, Mr. Calabria and Mr. Toder concede that the 

elimination of the mortgage interest deduction would reduce housing prices. They seem to think it might be a good thing since it 

would lower cost presumably for new buyers. 

Now, we already heard that 70 percent of the people who get this deduction are making less than $200,000. And I want to know how 

such a policy would affect seniors or people who are soon to retire 

who may have a significant portion of their savings in their house. 

To see their house drop by 10 percent or whatever, we don’t know, 

we are just guessing how much percentage. In Seattle they dropped 

about 30 percent in 2007. So we don’t know what is going to happen. 

But we are setting in motion a policy to pay for a reduction in 

corporate taxes down to 25 percent by taking it away from homeowners and people who were told by their father, as everybody on 

this dais was and practically half the people in the audience, when 

you get a chance, buy a house. Everybody in this country was told 

that. And some make it and some don’t. So what happens to those 

people? 

Ms. GRAVELLE. Well, in every transaction on the demand side 

there is somebody on the supply side and if we use housing that 

is the seller. Clearly, if house prices fall the people who are selling 

their houses are going to lose money from that. I would say, 

though, I am not convinced there is going to be a large effect, at 

least not in the long run. We are talking about permanent tax policy. Simply because in the long run the supply curve for housing 

is probably pretty flat, the only thing that would have an effect 

would be land. Maybe land would have an effect. 

But in the short term, the people who are within the few years 

while the market is adjusting, yes, it is going to be like a onetime—if you have a price fall it would also be partly a one-time hit 

to them as well as a hit to the demanders who are having a direct 

tax reduction. 

Mr. MCDERMOTT. Suppose this Committee decided that we 

would allow you to have a deduction for interest on any loan under 

$300,000. How would that affect the country? I mean, I look at the 

loan amounts State-by-State and all of the ones who are in the top 

14, with the exception of North Dakota and Utah, are on the coast. 

They are either Hawaii, Washington, Oregon, California or you 

start down the east coast and you get all the way down to Virginia. 

So what would happen if we set a cap? Let’s say we will allow you 

a deduction up to $300,000? 

Ms. GRAVELLE. Well, that is the proposal people are talking 

about now, lowering the cap. I mean, it just depends on where in 

the income distribution you want to constrain this benefit. So if you 

lower the cap to $300,000—mortgage interest you are talking 


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about—then you are going to have a smaller part of the community 

of homeowners having a marginal deduction. 

One of the problems, though, with these caps on deductions is 

they kind of worsen the problem that I talked about. I mean, you 

are creating essentially a bigger inframarginal benefit. So you are 

going to have more marginal tax that is sort of raising effective tax 

rates at the margin to trade off against the rates. But, basically, 

that is distributional. Right now the limit is $1 million and you will 

reduce substantially the benefits of the upper-middle-income-class 

individuals. And you would retain benefits for say the $75,000, 

$100,000, those kinds of taxpayers. 

Mr. MCDERMOTT. Yes, go ahead. 

Mr. CALABRIA. I want to make two quick points which, as I 

suggest in my testimony, I think we can do in a way where the 

same households who would be losing the mortgage interest deduction also see a corresponding decline in their tax burden so that we 

can construct this in a way that those households are held harmless tax wise. 

And, second, let me say, you know, on average overwhelmingly 

homeowners are wealthier than renters. And so to me, I think if 

we made it easier for renters to buy at the expense of households, 

that reduces wealth inequality, which is something I think we are 

concerned about. 

Mr. MCDERMOTT. We are talking about simplifying the Code, 

aren’t we? And you are talking about adding 53 more pages to talk 

about this tradeoff between—I don’t see how you make it simpler 

for the average person. For instance, John and I both got extensions. 

Chairman CAMP. Thank you. Mr. Reichert is recognized. 

Mr. REICHERT. Thank you, Mr. Chairman. Thank you for being 

here with us today. 

All of us in this room, and across the country recognize how difficult it is going to be to accomplish tax reform. But the process 

that we have been going through over the last couple of years now 

has been one of the most open. And I am only—this is my ninth 

year in Congress. I had a career prior to arriving here. But in my 

tenure here this has been one of the most open and transparent 

processes that I have been engaged in and I think most Members 

of this panel will agree with that. 

As the Chairman mentioned, we have had over 20 hearings regarding tax reform, all aspects of tax reform. One hearing associated with the working group that I work on—that I co-chair on tax 

exempt organizations—one hearing was 8 hours, 42 witnesses just 

a month or so ago. We have had working groups with hearings and 

discussions, open to all the Members here on this panel and open 

to all of you and the public. 

We have had discussion papers issued for people to review, open 

and transparent and all recognizing that we need to do tax reform. 

And this political rhetoric from an old cop’s perspective is really 

becoming tiring. What we need to do is work together for the American people to make sure that the tax law works for them, that we 

are not continually taking away from the American worker, from 

the hard working citizen every day. They need a simpler tax form. 


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They need a fairer tax form. And I think, again, every Member of 

this panel would agree with that. 

So to throw political bombs every time we have one of these 

hearings is becoming pretty hard to stomach from my point of view. 

I know there are people listening today across this country who, 

when they see this on some sort of a rerun sometime this evening, 

are thinking, you know, I am a family and I am looking to buy a 

home. My first home. Or if I have now owned my home for a while 

and am a family that has been able to work up the ladder, the economic ladder, and now I want to buy a second home. Or later in 

life, now over 60 like I am, maybe I am thinking about buying or 

selling my home and how does that affect me as I exit the home 

market, the discussion we are having? 

So, for at least these three points, the first home buyer, the family looking to buy a second home, or we have someone who is nearing retirement and looking at maybe selling their home, can you 

tell me how the mortgage interest rate deductions affect all of the 

families that I have just mentioned in each situation? Mr. Swagel, 

would you care to comment, please? 

Mr. SWAGEL. Sure. I would focus on the first one that you mentioned, because I think it is critically important to support the goal 

of home ownership and getting people from rental to home ownership. And mortgage interest deduction helps, it is just the benefits 

of that are mainly to people who don’t need the help. I mean, it 

is the structure of our Tax Code. Most first-time home buyers are 

not spending a million—don’t have a mortgage of a million dollars. 

We subsidize a million dollars, 1.1 including home equity. So the 

first-time home buyer gets help. Probably most of the benefits go 

to people who are not in that category. 

If we are exiting then, if we are someone who exits home ownership and goes into rental, they are losing the tax benefit. For many 

people home ownership as they age isn’t the right thing. And if this 

were providing them an incentive, the tax system is biasing their 

choices. To me, that is the biggest problem. We don’t want the tax 

system to tell people what to do or to bias them on what to do. And 

I think that is the case. 

Mr. REICHERT. If you have a senior, for example, my father-inlaw has just sold his home. His spouse, my mother-in-law, passed 

away 3 years ago. He sold his home and guess who he is moving 

in with. But he has been able to pay off his home. So we tax his 

income, income that he could use from that home to help subsidize 

his retirement, medical bills, et cetera, that he might have. That 

doesn’t make sense to me that the government is going to take 

away from a prudent man who has worked hard his entire life who 

is 88 years old. We are now going to take away some of his ability 

to pay for his retirement. Does that make sense to you? 

Mr. SWAGEL. I actually support the exemption for capital gains, 

the capital gains exemption. 

Chairman CAMP. All right. We will have to leave it at that. 

Mr. Lewis is recognized. 

Mr. LEWIS. Thank you very much, Mr. Chairman. And thank 

you so much for holding this hearing. I want to thank all of the 

witnesses for being here. 


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Ms. Gravelle, since the stock market crashed in 2008, my district 

in Metro Atlanta has been troubled with foreclosures. I want to go 

to what Dr. McDermott implied. Communities and families were 

turned upside down and there are still many of these families in 

the communities and neighborhoods that are troubled. In 1944, when I was only 4 years old, my father had saved $300. 

He bought a house, a home. He had been a share cropper. Bought 

a house and 110 acres of land. I know this is not 1944, but is it 

right, is it fair, would it be just for us to say to a working family, 

to a middle-class family that we are going to snatch the rug from 

under you? 

We have been told over and over again buy a piece of the rock. 

Own your little piece of land. Own a house. The Federal Government should be about helping, caring. Could you comment? 

Ms. GRAVELLE. Well, I think—first of all even though there is 

only about a third of people who use the mortgage interest deduction, two-thirds of people, families have their homes. And, as I said, 

I think one important issue to keep in mind is this is an asset for 

middle-class families. They have—— 

Mr. LEWIS. It is a major investment for middle—— 

Ms. GRAVELLE. If we look at the data we see one of the ways 

that people save is by acquiring a home. And whether they sell 

that home or whether they have a home that they don’t have a 

mortgage on when they retire, either one of them helps in their retirement benefit. 

So I think that is something to take into account. A lot of economists are very critical of the mortgage interest deduction for a lot 

of the reasons I have heard here and I am certainly aware of those. 

But I do think that is an important issue. And, by the way, my 

daddy was a share cropper too, and I came from Georgia, so we 

have some things in common here. 

Mr. LEWIS. Thank you. Well, you understand. 

Ms. GRAVELLE. I understand poverty. 

Mr. LEWIS. Thank you very much. I yield back. 

Chairman CAMP. Thank you. 

Mr. Roskam is recognized. 

Mr. ROSKAM. Thank you, Mr. Chairman. I just want to thank 

the panel. I feel like Tevye here in Fiddler on the Roof. On the one 

hand and on the other hand. I could listen to you talk for quite a 

while because I am finding myself learning things and that is what 

hearings are for. So thank you for your testimony and the sincerity 

with which you are approaching this. 

Mr. Calabria, a question for you as it relates to transitions. Let’s 

assume for the sake of argument that there is a sunset on the 

home interest deduction. How do you contemplate a good transition, a good set of transition rules, or how does that play into somebody that has operated on an assumption, that is a reasonable assumption, and that is hey, this thing is here to stay and they take 

on a 30-year obligation? What is the transition that is reasonable 

and fair and doesn’t pull the rug out from underneath the taxpayer? 

Mr. CALABRIA. Let’s start with the observation that it is a 30- 

year obligation, but the median life of a mortgage has historically 

been about 7 years. And in this interest rate environment I think 


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it will be closer to 8 or 9 because people are less likely to want to 

get a new mortgage with these low rates that they have today. 

With that said, the transition window doesn’t need to be 30 years. 

I think 7 or 8 would be the outside transition window that I would 

have. 

But you certainly could say whether you have a mortgage today 

versus people getting new mortgages coming in, I do think there 

are ways to make people held harmless. I also would note for families under $100,000 in income, the average I believe they are getting is about $200 in value annually 

from the mortgage interest deduction. For these families you could 

certainly just increase the standard deduction by $200 or $300 and 

they are held harmless post tax wise. 

So part of this question is do you hold them harmless on their 

mortgage? Do you hold them harmless on their tax burden? And so 

I think we could actually do this simply. Because you could certainly do it through standard deductions. You could do it through 

other ways that are not all that complicated. Of course you can also 

do it in complicated ways. 

Again, I would not have a transition period that goes for more 

than 7 or 8 years tops. But I think you can front load that in 3 

or 4 years and most of the benefits and most of the costs would be 

there. But, again, I want to emphasize I believe it should be done 

in a budget neutral way where you are leaving the same families 

more or less the same after tax. They are just not tied to their 

mortgage. 

Mr. ROSKAM. I understood everything you just said. What about 

the person, though, that isn’t part of the average or isn’t part of 

the mean, they are outlier and they tend to write their Members 

of Congress, and they say, look, you know I have a 30-year mortgage. So are they pressing their nose up against the glass looking 

in or do they get accommodated somehow? 

Mr. CALABRIA. Again, the question is whether you want to hold 

them harmless on the house, which, again, only matters in tight 

housing markets. In places like Houston there is not really going 

to be a long-run price impact. Are you going to hold them harmless 

after tax? Now, I think you could hold them harmless after tax by 

again looking at things like whether you want to give a special deduction for your homeowner. And if you want to subsidize ownership, you can give a deduction for a homeowner whether they have 

a mortgage or not. 

My primary point here today is that if we care about home ownership, we should not be tying it to a mortgage, we should be tying 

it to home ownership which, again, I am skeptical whether the benefits outweigh it but, again, that is what the discussion should be 

about, not about having a bigger mortgage. 

Mr. ROSKAM. The phrase that you used during your testimony 

or during one of the responses, you said give households something 

to pass on, not debt. What did you mean by that? 

Mr. CALABRIA. If I want to have a variety of ways to try to get 

people into home ownership, certainly some sort of matched down 

payment assistance could be a direction. If you want to help them 

try to build equity—I will use myself, I live in the District of Columbia so, unsurprisingly, I have a large mortgage. I think what 


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bothers me is the fact that—and, again, I don’t want to paint myself as representative, but I would like to pay more of it down. But 

the fact that I will be penalized by the Tax Code for reducing my 

own leverage strikes me as ridiculous. It is making me make bad 

decisions. 

Mr. ROSKAM. Thank you. I yield back. 

Chairman CAMP. Mr. Neal. 

Mr. NEAL. Thank you, Mr. Chairman. Thank you to the panelists. There are few items in economics that touch every aspect of 

economics like housing. Income elasticity, supply, demand, tax policy. And I associate myself with Mr. Tiberi and Mr. Lewis on this, 

because I think still trying to get people into home ownership is a 

desirable goal. 

My public life was in local government and trying to generate 

new units and trying to find a place where interest rates and price 

would get people into the market. We were able to come to one fast 

conclusion. Once people owned a home they really helped to transform the neighborhood. They made pretty good decisions every day. 

If you are working and you own a home, it is part of building a 

community. 

I think one of the dangers of the tax reform discussion we are 

having, and it is a long way off I think to conclusion, but certainly 

a compliment to the Chairman as well on conversational tone of 

these get-togethers we have had, because they really have been 

learning experiences. But I think we need to be mindful of what 

broadening the base could mean. 

Broadening the base really could mean that middle-income people are going to be paying more in an effort to cut that rate from 

35 to, as the President has suggested, 28 and Members on the 

other side have suggested 25. But the homeowner deduction really 

does serve a very necessary purpose and that purpose is getting 

people who can do it—I think one of the outcomes of the financial 

crisis that we witnessed was—albeit a slow discovery, but renting 

is a good idea for some. But, nonetheless, still in an old city in New 

England home ownership is essential. 

I thought that some of the testimony, particularly from Ms. 

Gravelle, you suggested that identifying tax provisions that would 

allow significant reductions in the top rates while maintaining the 

current distribution of tax burdens, what do you mean by that exactly? 

Ms. GRAVELLE. Well, again, in our report we identified a handful of provisions that are significant at the top. That is capital 

gains, capital gains at death, dividends, pensions, and then the two 

itemized deductions really important for those folks, charitable contributions and State and local income tax deductions. But 70 percent of those provisions are related to savings incentives. 

So if you are reluctant to go after those savings incentives, and 

there are reasons you might want to be, that makes it very hard. 

If we eliminate all itemized deductions as we said, we have about 

5 percentage points. So that is a long way from the distance that 

people were talking about for the top rate. 

Mr. NEAL. Well, I have an interest in savings here, how to generate greater savings, and as you have described it, maybe you 

could comment on this. I suspect the answer might be in some 


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measure a bit illusive. But there are some who put the devil’s advocate hat on that say that after you do home improvements and 

after you keep adding on an additional room or you keep exploring 

new ways to improve the property that in some measure it might 

not look quite as good or as appealing as it originally did as you 

relate it to the whole notion of savings. Could you speak to that? 

Ms. GRAVELLE. I’m sorry; could you clarify? 

Mr. NEAL. Well, there are those who argue from time to time 

that after one gets done improving a home over the course of a 30- 

year mortgage and all the things you do, because as you improve 

the home property taxes go up and even the value of the home 

might not go up, given what has happened in the last 5 years 

which remains fairly stable, there are those who say it is not quite 

as good a deal as it ordinarily would be. But is that a vagary of 

the marketplace or just a—— 

Ms. GRAVELLE. Well, I think that is the marketplace. I mean, 

if you look at housing before the housing bubble burst, housing 

looked like a very, very good investment. At least my house was 

a good investment. It fell down a little bit. It is going to come back 

up. I mean, this is a blip in the market. 

So I think homes are not a bad investment. The only way in 

which they are kind of questionable is if you put too much of your 

money in a home you don’t diversify your portfolio very much. But 

then that is savings that you wouldn’t have had anyway and people 

do tend to be a little myopic about savings sometimes. They don’t 

really think about the future as much as perhaps we economists 

say they should. If it is just extra saving, then that is all to the 

good for your ability in retirement to have a decent standard of living. 

Mr. NEAL. Mr. Calabria is pining to get an opportunity here. 

Mr. CALABRIA. I just wanted to make two quick points. Professor Schiller at Yale has estimated—put together a price series 

for the last 100 years and has found that the after-tax return of 

housing over the last 100 years has averaged 1 percent annually. 

So I do think the last—— 

Chairman CAMP. We are going to have to leave it right there. 

We will go to Mr. Buchanan. 

Mr. BUCHANAN. Thank you, Mr. Chairman. And I want to 

thank each of our witnesses for being here today. I am a Member 

from Florida and this recession has been brutal on homebuilders 

and jobs. Florida is growing at a thousand people a day, you know, 

over the last couple of decades or so. We are in a tendency now 

where we are starting to come back. A lot of our builders have been 

basically put out of business, but they are starting to come back, 

as well. 

But I will tell you this, what I have seen lately and really over 

the last 30 years, the interest deduction does make a difference. I 

see a lot of homes that are being built in our area, the ones that 

can afford to buy a second home or buy a home, a lot of them, 70 

percent, are paying cash. But the other part of it in terms of southwest Florida, there are a lot of people who are buying homes for 

$200, $250, $280 thousand. That is where the marketplace is. I 

think of two or three of our largest homebuilders that have survived this and that is where their focus is. 


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A lot of those are young families, first and second home buyers. 

A lot of them have student loans or they are people that are working, technicians in our area. They are making $50,000 a year. They 

are being squeezed in terms of higher health costs and everything 

else in their area. But the interest deduction to a lot of them is a 

difference of $200 or $300 when they look at the overall payment 

that they are going to get back or to have that break in terms of 

going forward. 

So I would just ask, Mr. Fleming, when you look at this, this 

hasn’t just been a recession in Florida. I hate using this word, but 

it has been a depression. We are starting to get some momentum 

coming back, especially in terms of homes $250,000 and under. 

What impact will this have, do you think, on eliminating that deduction? I just see this having a huge impact on a lot of people in 

our area. 

Mr. FLEMING. Yes, it is true. You unfortunately are from one 

of the poster childs of everything that went wrong in the housing 

market over the last 5 years. And there is recovery there. In large 

part, actually, the housing recovery that you are seeing is being 

driven by what are typically abnormal forces in the housing market. Institutional investor activity, lots of cash buyers. These are 

not the normal things that drive prices up. It is typically growing 

incomes and first-time home buyers entering the market and 

things like that. 

It is hard to say, I guess. I was laughing with a colleague of mine 

this morning saying the only thing I can be absolutely sure about 

with the mortgage interest deduction is that given that it creates 

both the incentive to consume more homes and some level of increased home ownership in and of itself. But all of that urban 

sprawl and traffic that I had to drive through to get here this 

morning can be attributed in part to mortgage interest deduction. 

Of that I am sure. 

But in other terms I think we have to be very careful. The price 

responds to something like a change, any sudden change. My testimony kind of gets to the point that suppliers, sellers, and buyers 

immediately respond to temporary change or immediate shock. 

Right? And we saw it in the first-time home buyer tax credit, we 

saw it with the capital gains tax. 

So the idea of an immediate shock happening, yes. The magnitude, harder to tell. Most of the models that we look at, the econometric models that come up with estimates of the price changes, 

basically hold the supply side inelastically fixed. In other words, 

there is no supply response to the impact. So of course the price 

response is bigger. In the immediate term that is true. It takes on 

average 9 months to build a home. Right? But in the longer run, 

of course there is going to be some sort of supply response to it. 

So it really gets down to, yes, maybe there is an immediate shock 

but the overall longer-run benefit is not necessarily as strong as 

the estimates that are empirically derived show. 

Mr. BUCHANAN. Any of the other panelists, I would like to get 

your thoughts. 

Mr. CALABRIA. I will make a couple of quick—clearly in my 

proposal I want to hold those families harmless after tax. I want 

to emphasize that. Second, $180,000 and below, if that is your only 


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deduction is the mortgage interest deduction, you are better off 

itemizing. And we see that. And, third, as I mentioned in my testimony, the value of the mortgage interest deduction fluctuates with 

interest rates and, interestingly enough, if you did a time series 

when you value the mortgage interest deduction at its highest it 

is actually when construction is at its lowest. So they are inversely 

related. I have seen very little, if any, evidence to suggest to me 

that we see extra construction because of the mortgage interest deduction. Ultimately construction is driven by population and household formation. 

Mr. BUCHANAN. The point I was trying to make, in the real 

world just looking on the ground there, there are a lot of families, 

whether they are 30, 35, two workers in the family, that deduction 

of $200 or $300 makes a difference per month because that is what 

they are going to see. And the second point is we are historically 

low in terms of our interest rates at 3 or 4 percent. If you go back 

over 30 years, I remember you could not get a mortgage rate under 

10 percent, but normally 7 or 8 percent. Again, that would even be 

a bigger issue for them going forward. 

Chairman CAMP. Mr. Pascrell is recognized. 

Mr. PASCRELL. Thank you, Mr. Chairman. As was mentioned 

previously by Chairman Johnson, we worked over the last several 

weeks having I think seven really concrete meetings with different 

groups and looking at the possibility, not only in residential but 

commercial real estate. And our objective, Mr. Chairman, was to 

see whether some sheltering of income, some incentives, or any of 

them, made sense in terms of economic strength and fairness. I 

think that was significant in every group that we talked with, and 

it was certainly an elevated discussion all the time and it was civil 

and thanks to Mr. Johnson I think we did a lot of work in a very 

short period of time. 

The Tax Code has many provisions that impact residential real 

estate. And some of them, including mortgage interest deduction 

and deduction for State and local property taxes, are among the 

largest expenditures. 

It is not a surprise that they would be looked at in a quest to 

eliminate expenditures to lower the rates. But I think we need to 

proceed with caution. And you heard that this morning from our 

great panelists here. 

These expenditures are large not by accident. They are large because they are well understood and utilized by the middle class. 

We can’t simply do tax reform and we can’t do tax reform simply 

for tax reform’s sake. We want to come out of this. I mean, most 

of the pages that are written in the Code were not written by you, 

Mr. Chairman, or me. They were not written by average middleclass folks. Huge groups that could afford a lot of lawyers, wanted 

to hide certain parts of their income. They are not criminals to do 

that. But we are looking at what is fair and what is not fair. And 

I think both sides would agree to that simple statement. 

Ms. Gravelle, I have a question. In your testimony you made a 

point that the tax preferences for owner-occupied houses like the 

mortgage interest deduction and the deduction for State and local 

taxes, are not the tax preferences most significant to the top tax 

brackets. I think that is what you said. Am I correct? 


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Ms. GRAVELLE. Yes. Yes, that is right. 

Mr. PASCRELL. I strongly believe that we need to do something 

about income inequality in this country. Now, according to a recent 

study by Samuel Saez of the University of California Berkeley, the 

top 1 percent of households captured 121 percent of income gains 

between 2009 and back to 2001. The 99 percent actually grew 

poorer. Between 1993 and 2011 the top 1 percent income grew by 

57.5 percent while income for the rest grew 5.8 percent. What is the percentage of taxpayers with incomes over $1 million 

who take the mortgage interest deduction? Do you know that? 

Ms. GRAVELLE. I think it is a large percentage. But it is a 

small percentage of their income. High-income people have houses 

and sometimes they have mortgages, but I imagine Eric is pointing 

his finger here; he knows this answer better than I do. 

Mr. PASCRELL. Go ahead. 

Mr. TODER. I think about a third of the people with income over $1 million take the mortgage interest deduction. And many of them 

have already either paid down their mortgages or, actually, I 

should say benefited from it, because we assume that if you eliminated the mortgage interest deduction many of those people would 

just simply pay off their mortgages. 

Mr. PASCRELL. Does that hold also for State and local taxes? 

Mr. TODER. Almost all of them would be taking State and local 

tax deductions. 

Mr. PASCRELL. So pretty much the same; right? 

Mr. TODER. Right. 

Mr. PASCRELL. According to the Joint Committee on Taxation, 

75 percent—75 percent of the MID is claimed by taxpayers with incomes below $200,000. That is what Mr. Tiberi and Mr. Levin 

pointed out before. It is about the same for State and local taxes. 

And I agree and associate myself with the words of Mr. Levin and 

Mr. Tiberi. If we eliminate the deductions for mortgage interest 

and State and local taxes, how much would tax rates have to come 

down in order to ensure the middle class is going to be paying an 

overall lower effective rate? 

Chairman CAMP. If you could answer briefly because time has 

expired. 

Ms. GRAVELLE. Just from memory, I think it is somewhere— 

that class of those deductions are about 10 percent of income. So 

you are talking about a 10 percent rate reduction. 

Chairman CAMP. Thank you. 

Ms. Jenkins is recognized. 

Ms. JENKINS. Thank you for being here. Thank you, Mr. Chairman. 

Mr. Toder, your testimony comes to the conclusion that the mortgage interest deduction does a poor job at promoting home ownership. It mentions studies that have compared home ownership 

rates in countries like Canada, the United Kingdom and Australia. 

Can you just elaborate for us on how the U.S. compares in terms 

of overall home ownership rates to those similar countries and 

what sort of policies those other countries employ to promote home 

ownership? 

Mr. TODER. I am not sure what all the policies are in terms of 

their financial market policies, but Canada, Australia and New 


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Zealand have all eliminated the mortgage interest deduction, which 

they previously used to allow. The United Kingdom has been phasing it out over a long period of time. They were actually doing it 

through the banks, so you would get it at the basic rate. The people 

above the basic rate wouldn’t benefit from it. But they gave the 

subsidy to the lender and that had the same effect, really had 

the same effect as the proposals I am talking about, of converting 

the deduction to a credit, which would give the same percentage 

subsidy to everybody. So that was the way they did it. But in all 

of those places the home ownership rate is at least as high as it 

is in the U.S. 

Ms. JENKINS. Okay. Speaking of that, you noted that recent 

major tax reform proposals, including Simpson-Bowles and the 

President’s 2005 Tax Reform Advisory Panel and the Bipartisan 

Policy Center, have all recommended moving from an interest deduction to tax credits. 

The general consensus appears to be between 12 to 15 percent 

credit and either refundable or nonrefundable. I believe that you 

worked with the Bipartisan Policy Center on developing their tax 

reform proposals. So could you just describe for us how the determination was made to arrive at that credit level, whether to make 

it refundable, and what sort of deliberations took place? 

Mr. TODER. Sure, I would be happy to. I was a consultant to 

them. I was not a decisionmaker but I was helping them with the 

analysis. 

Ms. JENKINS. Okay. 

Mr. TODER. They were trying to get a much broader tax reform 

as part of an overall package to reduce the deficit, so their tax reform was actually raising revenue a bit. They started out with the 

idea that they wanted to get rid of as many tax expenditures as 

possible but came to the conclusion that some of them had to be 

retained in some form, one of which was mortgage interest, another 

one was charitable. 

They also developed the very far-reaching idea that they would 

like to get many people out of having to file tax returns. So the way 

they went about that was they restructured all of the basic benefits. They eliminated the standard deduction, personal exemptions, 

and the earned income credit. They replaced them with a flat child 

credit and a flat earning subsidy. 

So they set it up so that if you were in the lowest tax bracket, 

and you didn’t have a lot of capital gains, you didn’t have to file 

a return. It would all come out through withholding. And so this 

kind of mortgage interest subsidy fit into that. It was a subsidy at 

the basic rate of 15 percent, which was the bottom rate in their 

proposal. 

Ms. JENKINS. Yes, Mr. Swagel. 

Mr. SWAGEL. I would just like to add to what Eric said, the 

comparison between a credit and a deduction is an important one. 

The deduction is valuable to people at the bottom, but it is really 

valuable to people at the top. Whereas the credit, of course, is the 

same amount for everyone, depending on whether it is refundable 

or not. 

So in the sense of moving from deduction to credit it probably 

better focuses the taxpayer resources on lower incomes. Because for 


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the person starting out, Ms. Jenkins, a person buying a $250,000 

house, they will get the same credit as someone using the full $1.1 

million of deduction, whereas in the current system they don’t. 

Ms. JENKINS. Thank you. 

Mr. JOHNSON [presiding]. Mr. Davis, you are recognized. 

Mr. DAVIS. Thank you, Mr. Chairman. I want to thank all the 

witnesses for coming. Ms. Gravelle, the National Housing Trust 

Fund was authorized in the Housing Economic Recovery Act of 2008 

specifically to address the housing needs of extremely-low-income 

households. The NHTF is a block grant to States that, once funded, 

can be used to produce, preserve, rehabilitate and operate rental 

homes for very-low-income households. At least 90 percent of the 

funds must be used for rental housing and at least 75 percent must 

benefit extremely-low-income households. 

The NHTF is intended to be a permanent program with dedicated sources of funding, not subject to the annual appropriations 

process. The funds are to be distributed by a formula based on factors detailed in the statute with a $5 billion investment. Michigan 

would receive $146.1 million. The NHTF was initially to be funded 

by contributions from the government-sponsored enterprises Fannie 

Mae and Freddie Mac; however, shortly after HERA was enacted 

the financial crisis hit and of course these agencies were taken over 

by a conservatorship and funding was suspended. And, of course, 

Congress has never actually put the money in in the first place. 

The National Low Income Housing Coalition has talked a great 

deal about assistance to renters, that these individuals need some 

kind of help and could benefit greatly from it. And there have even 

been some who have talked about a renter’s tax credit. How do you 

respond to those kind of thoughts? 

Ms. GRAVELLE. Well, you could have a renter’s tax credit for 

low-income people if you make it refundable. But it wouldn’t work 

otherwise, because very low-income people don’t generally pay 

taxes because of the earned income credit and other provisions. I 

mean, for getting money to low-income housing there are a lot of 

different routes. The low-income housing credit in the Tax Code is 

one method, but it has to pass through a lot of middle men on the 

way so a lot of folks think that grants would be better. 

The other thing you could do is give people vouchers for rental 

housing directly from the government. Or, as I said, you could do 

it through refundable tax credit. The problem is people who don’t 

file taxes then would have to file. A lot of people do, if they 

are working, because of the earned income credit. But there is 

always—for this particular objective there are a lot of different 

ways to get there. 

And I would say—maybe Eric can tell me what he thinks—the 

consensus is that usually these things are better done through 

spending rather than routing them through the tax system. 

Mr. DAVIS. Are there any other thoughts or ways that we might 

want to look at or could look at to try to make sure that these individuals or this category of citizens actually get some benefit that 

might move them a little bit beyond where they are relative to decent housing? 

Ms. GRAVELLE. Low-income housing issues in general are not 

really something that I have studied a great deal. But I think there 


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has been a concern about diversifying the neighborhoods so you 

don’t have pockets of low-income people in the same place. Those 

are some of the issues I know that come up with public housing. 

But I think an economist might say the easiest way is to give 

people a voucher to help pay their rent. That might be the easiest 

and most straightforward way to do it. 

Mr. CALABRIA. I will just quickly mention, because I mentioned 

in my testimony, the real difference between owners and renters is 

that we don’t tax imputed rent for owners. And I suggested in my 

testimony that we stop taxing rent and we could limit that to rents 

charged below a certain level that are affordable. And if the market 

is competitive in certain places that will get passed on to the 

renter. 

Mr. DAVIS. Thank you both very much. Thank you, Mr. Chairman. And I yield back. 

Mr. JOHNSON. Thank you. Mr. Paulsen, you are recognized. 

Mr. PAULSEN. Thank you, Mr. Chairman. I have actually found 

this testimony very enlightening. It is part of that whole process 

of really diving in deep as to what the Tax Code is really about, 

because it is deep. If you do make changes in one area, it impacts 

quite a few different areas in other sections of the Code. 

Again, this is not about doing tax reform for tax reform’s sake. 

This is about finding real solutions for a broken Tax Code. Everyone acknowledges the Tax Code is broken and we need a Tax Code 

that helps America compete and win, that grows the economy, that 

grows jobs. And we need a Tax Code that is a lot simpler and fairer 

so that an average family can actually do their own taxes. 

I find it astonishing that still nine out of ten American families 

are either required to pay someone else to do their taxes or purchase some sort of commercial software in order to do those taxes. 

And that is just not a Tax Code that is designed for the average 

person obviously in terms of simplicity. That is a Tax Code that is 

designed for accountants and lawyers and others. 

There is a lot of inefficiency and it really is time for us—and we 

are doing the right thing in terms of having 20-plus hearings, laying the groundwork, moving forward with these working groups, to 

making sure it is not going to be a continuing process of just special interests and handouts and bailouts, but really getting into the 

details. 

But I want to dive a little bit more into the low-income tax 

credit. This is an area where I have spent some time with some 

folks in Minnesota. I have seen the homes that the low-income tax 

credit has actually produced through rehabilitation and loans to individuals. I do hear from the providers all the time that this is a 

credit that is a very effective way of producing affordable housing 

and providing homes for those who need them. 

So knowing that is the case—and part of the problem in the past 

has been I wonder is this tax provision going to be extended, is it 

going to be extended once again? So there is no certainty, there is 

no predictability for building the housing. So that is one of the 

goals of tax reform, to make sure that we have predictability and 

certainty. 

But just to follow up, what would happen if that tax credit just 

went away? Would making that tax credit permanent improve reVerDate Sep 11 2014 09:01 Jan 26, 2017 Jkt 021124 PO 00000 Frm 00098 Fmt 6633 Sfmt 6602 I:\WAYS\WAYSPS\21124\21124.XXX 21124

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sults or whatever takes its place improve results? And is there a 

way we can actually improve that credit for better results? It has 

been a public-private partnership. Mr. Swagel, you talked a little 

bit about that in your testimony. I know this is a long section of 

the Tax Code. But can you just maybe elaborate a little bit more? 

Mr. SWAGEL. Sure. I think the permanence would be really important. It could get at this uncertainty. The other thing that 

would help is that the value of the tax credit varies with the economic cycle and the demand for it. And so there is a sense in which 

it is not clear that the Tax Code is the best way to do this. If we 

want more supply of affordable housing units, which I think as a 

Nation we do, it is probably better done as spending and not to run 

it through the Tax Code. 

The other thing that might be considered, and, again, it is not 

argument to say do less of it, it is really do it better. But I think 

my testimony questions its effectiveness. And really it is that, is it 

effective and what is the best way to make it effective? Because we 

want to do both supply and demand, not supply or demand. The 

vouchers will help on the demand side and I think the affordable 

housing tax credit, if there were a better way of doing it, could help 

on the supply side. 

Mr. PAULSEN. Mr. Calabria. 

Mr. CALABRIA. Honestly, I have been a little skeptical and certainly looked at the low-income tax credit over time. I certainly understand why users of a program think it is a great program. But 

to me the academic evidence suggests: (a) There is a tremendous 

amount of crowd-out and about half of the units would have gotten 

built otherwise; and (b) There is evidence to suggest that most of 

the subsidy ends up with developers, syndicators, and lawyers. And 

I have nothing against developers, syndicators, and lawyers, all 

good people, but they are not necessarily who I think we should 

prioritize subsidizing. 

And so I am skeptical of it as a delivery vehicle. My tendency— 

I really—I know that public-private always sounds like a good 

thing, but I remember for years telling what a great public-private 

partnership Fannie Mae was for the government and that didn’t 

turn out so well. 

So I do think we need to rethink some of what that means. I 

think Phil alluded to this earlier. I think that we should directly 

subsidize the people that we want to directly subsidize. If we care 

about low-income households, let’s subsidize low-income households. I am very skeptical of doing roundabout ways through intermediaries. If the problem is somebody is poor, let’s make them not 

poor. That seems like a pretty straightforward way of doing it to 

me. 

Mr. SWAGEL. One other thought to add, what you heard from 

the constituents in Minnesota is on the upkeep. And that really is 

the case. That the tax credit subsidized units do have better upkeep and that eventually those units go back to a fully private 

model. And I think that is the challenge. How do we get that? How 

do we make sure that low-income subsidies are not just Section 8, 

not just for low-income people, but have the diversity and that incentive for better upkeep? 


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Mr. CALABRIA. The geographic evidence suggests to me that tax 

credit properties do get built in areas that are already high concentrations of race and poverty. So I tend to be more preferential 

to vouchers because I think we want to be able to get people into 

good communities rather than continuing to build properties in 

neighborhoods that already have problems and high concentrations 

of poverty to begin with. 

Chairman CAMP [presiding]. Time has expired. Ms. Sanchez is 

recognized. 

Ms. SANCHEZ. Thank you, Mr. Chairman. And I want to thank 

all of our panelists for sharing their thoughts with us today. 

I represent a pretty working class district in southern California 

and my constituents work very hard, often long hours and multiple 

jobs in order to just save up the money to purchase their first 

home. So for me it is incredibly important to make sure that we 

don’t make it more difficult for working people to achieve the 

American dream of owning their own home. And that is why I am 

a little bit skeptical of changes to the Tax Code that would have 

the effect of putting that goal for them out of reach. 

Just last month we did a housing event in one of the cities in 

my district, Pico Rivera, that was aimed at doing two things: Helping current homeowners keep their homes and educating potential 

first-time home buyers about the process of purchasing a home. 

And at that event for the first time in a long time we started to 

hear many positive signs about the local housing market improving 

and gaining strength. 

And that was in marked contrast to the past several years when 

housing or the fear people had about losing their housing was overwhelmingly the number one issue that constituents were calling 

into my office and asking for help on. 

So targeted provisions in our Tax Code, things like excluding the 

discharge of principal residence indebtedness from income, have 

helped turn that tide and have gotten the housing market back on 

the right track. With the turning of that tide I think come good 

paying jobs in both the construction and the housing industries, 

good paying jobs that help a new group of people in turn achieve 

their dream of home ownership. 

Some of the overarching themes in the tax reform discussions 

that we have had are a little bit concerning to me. My biggest concern is that we not pay for tax reform on the backs of working people. Broadening the base and lowering the rate sounds great, it is 

a great bumper sticker, it is a great slogan, but that can’t come at 

the cost of working class families. 

We have heard from some of the panelists today that targeted 

housing provisions in our Code create economic and market distortion, but many tax expenditures are essential to maintaining parts 

of our market and economy that help create good paying jobs. 

Many provisions discussed today help serve that very purpose. 

So my first question, Ms. Gravelle, could you elaborate a little bit 

further on just how hard it will be to achieve the Majority’s tax reform principle, this broadening the base and lowering the rate, especially with respect to those tax incentives that are net positive 

with respect to job creation? 


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Ms. GRAVELLE. In our study, we took the top 20 tax expenditures, which account for 90 percent of the revenue, and we went 

through them one by one and said, okay, what are these, what are 

the merits of these, what are the objectives. And, again, a large 

fraction of those provisions relate to savings. Or just take something like capital gains. Even if you wanted to tax capital gains at 

ordinary rates, the scoring methodology would not give you revenue 

from capital gains. 

Some of them are very difficult technically. For example, even 

though a lot of people talk about taxing employee health benefits, 

it is actually very difficult to impute the value of that to people in 

many different circumstances. And that came up during health reform. That is very hard to do, and that is why they ended up with 

a very limited, sort of the Cadillac of tax provisions. 

Defined benefit pension plans. How do you impute income? Do 

we really want to tax Medicare recipients on the value of their 

Medicare benefits? What do we want to do? Do we want to leave 

the earned income credit in place? Do we want to disallow the taxation for catastrophic medical expenses? 

We went through each of those one by one, and when we finished 

examining them, we just concluded that, for a whole variety of reasons, the objectives, the technicalities, the merits in general, that 

it was just very hard to have a large base broadening. If you eliminated every tax expenditure, we found that you could get the top 

rate down to about 23 percent, but once you start cutting those out, 

it gets harder and harder to do that. And that CRS report is out 

there, you know, it is available for people to look at. It shows how 

careful we were going through each provision one by one. 

Ms. SANCHEZ. And each of those provisions you just discussed, 

I am assuming probably affect middle-income and low-income people more than any other group. 

Ms. GRAVELLE. We look at some that affect middle-income and 

some high-income, but many of these provisions, like employee 

health insurance, really are a middle-income—— 

Chairman CAMP. All right. Time has expired. 

Mr. Kelly is recognized. 

All right. Mr. Griffin is recognized. 

Mr. GRIFFIN. Thank you, Mr. Chairman. Thank you all for 

being here today. I appreciate it. This has been a very helpful hearing. 

And I want to echo some of the comments I have heard from 

some of my colleagues, in that we are taking a comprehensive look 

at the Tax Code because most folks agree that it is a mess and it 

is counterproductive. And if we are going to encourage economic 

growth and job creation, the Tax Code right now, in my view, is 

a barrier to that. That is why we are doing this. We are not doing 

it for the sake of it because we don’t have anything else to do. We 

are doing it because it is helpful to this country to fix this Tax 

Code. 

You know, on the way back from Afghanistan about a year and 

a half ago, while the pilots were resting, we stopped in Estonia, 

and we met with the former Prime Minister, who is now the Defense Minister, and he was telling us about his tax system. They 

said they pay in Estonia, they pay their income tax online in about 


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15 minutes. The average Estonian takes 15 minutes to pay their 

tax. Now, I am not promoting their particular way of taxation, but 

the point is that we can do much, much better. Whatever that 

looks like, we can do much, much better. And, you know, we certainly can do as well as the beautiful country of Estonia. 

And I would say that the best thing for working families, working families in Arkansas that I represent, or wherever, the best 

thing for them is a growing economy and remaining competitive 

internationally. So that is why we are doing this. 

To address the mortgage interest deduction, I would like to say 

that I think it has been well said by many others here today that 

you can talk about, you know, the high-income folks that take advantage of it or whatever, but at its core, this benefits middle-class, 

working Americans. A lot of people count on this provision, and I 

think the statistics show this, whether you are looking at the percentage that are under $200,000 in income or $100,000. 

But one thing that I wanted to explore a little bit, Mr. Calabria, 

if you could talk a little bit about your comment earlier where you 

said, I think it was you, you said that the mortgage interest deduction incents more higher debt, not equity, not ownership. And if 

you could talk a little bit about that and your proposal to address 

that. 

Mr. CALABRIA. Sure. Let me start off by saying, you know, my 

proposal, I want to try to keep those families held harmless after 

taxes, not see their tax increase, but what we were doing is allowing them to prioritize, because, you know, I think housing is important, but I think education is important, I think healthcare, I think 

food is important, but I don’t think the direction to go is here in 

Washington where we decide what people should consume or where 

they put their marginal dollar. I think they are smart enough to 

figure that out for themselves, quite frankly. 

So the thing is to reduce these tax connections to various consumption items and let people make those decisions for themselves 

while keeping their taxes low. My point being, I think we can tie 

that in that way, leaving these families the same after tax, you 

know, in very much the same way. 

Mr. GRIFFIN. You would acknowledge, would you not, that some 

of the proposals for a credit instead of a deduction, if you left the 

tax rate the same, would really hit a lot of the folks that take advantage of the deduction, if you left the marginal rates the same. 

Mr. CALABRIA. It would. And so I do think—— 

Mr. GRIFFIN. Because it would be far less than the deduction. 

Mr. CALABRIA. So one of the objectives should be to try to lower 

marginal rates, because ultimately at the end of the day what we 

should be trying to achieve is growing household income and reducing the taxation of income, because income is what makes everything else in the world possible. So, you know, you could have all 

the mortgage interest deduction you want in the world, if the family doesn’t have the income to afford the house to begin with, it 

doesn’t matter. 

So, again, growing income should be our primary objective here, 

in my opinion. And I think a flat low rate like they have in Estonia 

should actually be something that we try to achieve and we should 


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try to reduce some of the complexity in the tax system while reducing the penalty to work. 

Mr. GRIFFIN. Is it fair to say that a lot of the reforms that you 

propose would depend upon that lower tax rate, it would not be to 

the Code as it currently is constituted? 

Chairman CAMP. And if you could answer briefly. 

Mr. CALABRIA. Yes or no, I think it is important to reduce leverage even if we don’t reduce overall tax rates, but I do think reducing tax rates should be part of that. 

Chairman CAMP. All right. 

Mr. GRIFFIN. Thank you, Mr. Chairman. 

Chairman CAMP. Mr. Renacci is recognized. 

Mr. RENACCI. Thank you, Mr. Chairman. And I want to thank 

all the panel for being here today also. 

You know, it is interesting. Of course, a lot of the questions have 

already been answered, but in my past life, before I got here, I was 

a CPA, and I remember sitting down with many people who walked 

in, some people just with a W–2, who said, help me do my tax return. So, again, I am going to repeat, as many of my colleagues 

have said, we need to make sure we have a simpler tax return so 

people can just file their tax return and not be concerned when 

they just have that W–2. 

But it is interesting, when it comes to home ownership, I had 

many that would come in and say, I am buying a home, but they 

never really asked what the interest deduction would do for them, 

either. And the question I always asked them was, well, you know, 

you are going to buy a home, have you looked at whether the economic value of buying that home is worth it, if the interest deduction is even going to help you? Are you better off to rent? In today’s 

day and age housing is not, you know, the old, I am going to buy 

a home and I will pay my mortgage down and housing prices are 

going to go up, I am going to have a nest egg at the end. I am not 

sure we are there today, when housing prices are not moving up 

as fast as they used to and at the same time the debt you are paying in some cases, because we already have the standard deduction 

of $6,500, is not even a deduction for you. So it is interesting how 

complicated the Tax Code can be. But what is more interesting is 

that many people, as I said, really don’t even care about the interest. 

My dad bought his first house, God love him, 30-plus years ago 

for $11,000 and probably never cared one bit about the interest deduction, and sold it 30 years later for $6,000. So it wasn’t an economic advantage to him to have that house. But my friend’s daughter is acquiring a house. She just got out of college. And she is not 

looking at—you know, I said to him, ‘‘Has she looked at the interest deduction?’’ And my friend said, ‘‘No, she doesn’t care, she just 

wants to own a home.’’ 

So it gets back to something you said, Mr. Calabria, which is interesting to me. You said that, and you didn’t finish, but the average after-tax return is less than 1 percent on home ownership. 

Could you explain that, go into more detail? 

Mr. CALABRIA. Sure. Bob Shiller, a finance professor at Yale, 

has put together a price series from 1890 to today, you know, when 

you put inflation in there, and so his calculation is after inflation 


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on an annual basis, housing returns about 1 percent for the value 

of the house. Now, of course, the retort is that, well, it can be massively leveraged and therefore your return is on that leverage. But 

as we have learned repeatedly, this was not the first financial crisis we had, and sadly, I don’t think it is going to be our last, that 

this massive leverage in the system repeatedly comes back and 

haunts you. Leverage maximizes gains, but it also maximizes losses. 

So my point here throughout the testimony is not—I think home 

ownership is a great thing, I think it is a good thing. I think households being massively leveraged is not a good thing and I don’t 

think we need—I think we can achieve high home ownership without massive leverage on the part of households. 

Mr. RENACCI. Mr. Fleming. 

Ms. GRAVELLE. Could I just make a comment about—— 

Mr. FLEMING. I will just say quickly, the idea of—and I think 

this is something that many forgot during the most recent crisis 

was you gain utility of shelter primarily from housing, not as a 

financial—— 

Ms. GRAVELLE. Absolutely. That is what I was going to say. 

That is the return. 

Mr. FLEMING [continuing]. Not as a financial investment. And 

to your point, many people make the decision about their tenure 

choice of how to achieve that shelter not by looking at the financial 

model of user costs. I mean, if you ask them, well, what did you 

use, did you look at the user costs of renting versus buying, they 

give you a blank stare, right? So it is about your position with, are 

you getting married, are you having children, you know, all these 

household and demographic types of things that drive that decision, and in some cases on the margin, maybe the financial decision, maybe the financial decision of, oh, I can get that mortgage 

interest deduction and that helps me make on the margin that 

choice of becoming a first-time home buyer. 

But honestly, first-time home buyers, their bigger constraint is 

the downpayment; not making the payment when they are in 

there, but getting access to a downpayment. 

Mr. RENACCI. If there was an opportunity to build savings before you went into home ownership, and then use that savings to 

buy that home, that is something that we probably should look at, 

too. 

Mr. FLEMING. Right. That is the challenge. And you see the 

first-time home buyer tax credit most recently clearly drew in a lot 

of demand. People were able to overcome that building of downpayment problem to get at buying a home. 

Mr. RENACCI. Mr. Calabria, there was one other comment you 

made that I just want to understand. You said something about the 

renter, no tax for the—I am trying to figure that out. 

Mr. CALABRIA. Yeah. I know imputed rent is not necessarily a 

straightforward concept. So if you think about it, you know, you 

rent a unit, you are paying rent, the landlord is paying tax on that 

rent. And so the economists tend to think, well, if you bought a 

unit, you are renting it from yourself, but you are not paying tax, 

and so that makes the choice between you becoming a renter less 

attractive if you were an owner. Because remember, all the mortgage interest, all the property tax stuff, that is expensible for the 


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landlord, too, so there is a quality there. And so the real impact, 

again, is, as I would suggest, if we stop taxing rent, we will level 

the playing field between renters and homeowners. 

Mr. RENACCI. All right. 

Chairman CAMP. Thank you. 

Mr. RENACCI. Thank you. 

Chairman CAMP. We have two people who are going to come 

question and then I am going to the second panel. So we will go 

to Mr. Blumenauer and then to Mr. Reed, and then we will go to 

the second panel. 

Mr. BLUMENAUER. Thank you, Mr. Chairman. And I appreciate the way the two panels have been structured to, I think, walk 

us through the big picture. It is actually one of those rare times 

when the written testimony is actually better on both panels, and 

we really appreciate that. 

I would like to just take a slight, it is not a digression, but take 

one aspect of this. I have spent a lot of time working with a number of the organizations that will be testifying dealing with trying 

to have a functional flood insurance program that adds stability to 

the market. We have also spent a lot of time working on disaster 

relief, prevention, recovery, which, because of what has happened 

with climate instability, these costs are skyrocketing for the Federal Government. 

I am interested in any observations that you might have, and I 

would look for some from the other panelists later, to the extent 

to which we are using the tax system to subsidize people living in 

places where it has repeatedly been shown that nature may not 

want them. We have legislation that prohibits Federal investment 

dating back to the Reagan era, the Coastal Barriers Protection Act, 

where we don’t put infrastructure there, yet we allow mortgage interest deductions for second homes in places that have been wiped 

out and we are spending money recovering. 

Do you have any thoughts about whether, regardless of what we 

do with mortgage interest reduction and tax reform, we might do 

a deeper dive to limit the exposure to the taxpayer paying twice, 

once to subsidize people living in a place that they probably 

shouldn’t be, and then repeatedly going back in, cleaning up, paying disaster payments, and then allowing continued subsidization 

of that development? Any thoughts? 

Mr. CALABRIA. I will just mention, I will preface with, while 

staff on Senate Banking, I worked on all of our flood insurance 

issues and I actually headed our Katrina response for the Committee as well. And so I would certainly agree that we subsidize 

a number of policies that, in my opinion, do tremendous harm to 

the environment. For instance, I believe Fish and Wildlife Services 

have concluded that the flood insurance program has adversely impacted salmon runs. So there is a variety of negative impacts for 

subsidizing development in very sensitive areas, and I certainly 

think we should reconsider those subsidies. 

And, of course, it is also important to keep in mind, you know, 

while climate has changed, to me it looks like the evidence suggests the biggest problem is less that the disasters have gotten 

worse, but that we have moved to the disasters in a very big way. 


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And, of course, I do think our subsidies have been a very big part 

of that. 

Ms. GRAVELLE. If you are thinking about vacation homes on 

the coast and things like that, obviously one thing to consider 

would be to disallow some of these deductions for second homes. 

But aside from that, I mean, there is still, for wealthy people who 

are doing this, for high incomes, there is still the exclusion of imputed rent. Even if you don’t have a mortgage interest deduction, 

if you don’t have a mortgage, you still are not implicitly paying tax 

on that. And that is a trickier thing to try to attack. 

The other thing is, again, I just know a little bit about the whole 

flood issue, but I think most economists would say the fundamental 

problem here is not a proper market pricing of flood insurance. So 

if you have something that floods and you know you can expect it 

all the time, then the insurance should reflect the price of that, and 

then you leave, you know, the benefits for extraordinary, unusual 

calamities. 

Mr. SWAGEL. Right. I was just going to echo that. The flood insurance program has the unintended effect that you mentioned. 

And we see that in the State of Florida, which has almost driven 

private insurance out of the home sector. 

Mr. BLUMENAUER. Mr. Chairman, just one subset, and I will 

yield back my time in a moment. But it just seems to me that one 

of the things that ought to be examined, if you are going to be 

subsidizing second homes, for instance, with a mortgage interest 

deduction, at a minimum, the reduction for people that are in 

extreme—and it is not just flood. I mean, we have places in the 

flame zone. One in four homes in the flame zone is a second or 

third or fourth home, where we are paying huge sums of money in 

the west to try to protect them and then we go in afterwards. 

And I would think that this might be something that is worth 

looking at that wouldn’t be wildly disruptive to a real estate market. It might actually help stabilize it, but it would prevent the taxpayers from paying two or three times in areas where the costs are 

going up exponentially. 

Chairman CAMP. All right. 

Mr. BLUMENAUER. Thank you, Mr. Chairman. 

Chairman CAMP. Thank you. 

And I think we are done with our questions. So I want to thank 

this panel of witnesses for their testimony. The Committee greatly 

appreciates your testimony and your perspectives. And I also want 

to ask that if there are any questions that you want to submit in 

writing, we can add those to the formal hearing record. So, again, 

thank you for being here. 

I would like to call our next panel of witnesses forward, please. 

Mr. LEVIN. Mr. Chairman. 

Chairman CAMP. Also, I would like to recognize Mr. Levin. 

Mr. LEVIN. I would also like to thank the panel. 

And as we are shifting here, there is a gentleman behind me, 

Mike Hauswirth, who has been a valuable member of our staff 

since February of 2011, and before that, he was on Joint Tax. Mike 

is going to be leaving us to undertake new adventures. And I would 

like all of us to join in thanking Mike for all of your service both 

on our tax staff, but also on Joint Tax. 


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Chairman CAMP. Thank you. And if our second panel could 

come forward, please. I appreciate your patience this morning. I 

know many of you were in the room during all of the first panel. 

Now I would like to welcome our second panel, I know all of 

whom bring important perspectives on the residential real estate 

industry with them. 

And, again, thank you for your patience. I saw you sitting in the 

room during all the morning testimony. 

First, I would like to welcome Gary Thomas, President of the National Association of Realtors. Mr. Thomas has worked in realty for 

over 35 years. 

Second, we will hear from Robert Dietz, Assistant Vice President 

for Tax and Policy Issues at the National Association of Home 

Builders. Mr. Dietz formerly served as a revenue-estimating economist for housing issues at the Joint Committee on Taxation. 

Third, we will hear from Thomas Moran, Chairman and Managing Partner of Moran & Company in Chicago, Illinois, also appearing on behalf of the National Multi Housing Council and the 

National Apartment Association. Mr. Moran has specialized in private housing development for over four decades. 

Finally, we will hear from Robert Moss, a Senior Vice President 

at Boston Capital in Boston, Massachusetts, also appearing on behalf of the Housing Advisory Group in Boston. Mr. Moss serves on 

the boards of at least five housing associations. 

Again, thank you all for being with us today. The Committee has 

received each of your written statements and they are part of the 

formal hearing record. Each of you will be recognized for 5 minutes 

for oral remarks. 

And, Mr. Thomas, we will begin with you. Welcome. And you are 

recognized for 5 minutes. 

STATEMENT OF GARY THOMAS, PRESIDENT, 

NATIONAL ASSOCIATION OF REALTORS, WASHINGTON, DC 

Mr. THOMAS. Thank you. Chairman Camp, Ranking Member 

Levin, and Members of the Committee, thank you for this opportunity to testify on behalf of the 1 million members of the National 

Association of Realtors, who practice in all areas of residential and 

commercial real estate. 

My name is Gary Thomas and I serve as the 2013 President of 

the National Association of Realtors. And I, like most Americans, 

agree that a major goal of tax reform should be simplification. But 

simplification does not necessarily equal elimination. The Code currently contains simple, easy-to-understand housing-related tax provisions, enjoyed by millions of Americans, that have helped facilitate home ownership, build wealth, and provide stability to families 

and communities. 

In case there is any doubt, Realtors support maintaining current 

law for residential real estate tax provisions. Specifically, we urge 

you to maintain the current deduction for home mortgage interest, 

the deduction for real property taxes paid, and the capital gains exclusion for proceeds from the sale of a principal residence. 

My written testimony details these and other provisions, but I 

would like to focus on the mortgage interest deduction. Let me first 

clarify who benefits from the MID. In 2010, 37 million tax filers 


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claimed the mortgage interest deduction. Of those filers, 63 percent 

earned less than $100,000 and 91 percent earned less than 

$200,000. Roughly half of those claiming the MID were under the 

age of 45. Many of these filers also claimed dependents or credits 

for children. Moreover, homeowners pay between 80 and 90 percent 

of all Federal income tax. 

If you want to know the majority beneficiary of the MID, the answer is not the rich; rather, it is young middle-class families with 

children who already carry more than their fair share of the tax 

burden. If Congress were to eliminate the mortgage interest deduction, it could mean an average tax increase of over $2,500 per family. 

Realtors realize that most believe Congress would not attempt to 

completely eliminate the MID. We hope they are right. However, 

there have been several proposals to change the deduction or eliminate it for certain taxpayers. Let me briefly respond to three of the 

most frequently mentioned proposals. 

One proposal would eliminate the deduction for second homes. 

While critics portray second homeowners as millionaires with mansions by the ocean, this ignores the facts. NAR research shows that 

the median income of a second-home buyer last year was $92,000 

and the home they purchased cost $150,000. NAR research further 

shows that second-home sales make up 10 percent of all home sales 

each year. And all but one State has at least one county where 10 

percent or more of their real estate market is composed of second 

homes. The economic impact second homes have on these communities should not be ignored, either. 

Another proposal is to cut the amount of eligible mortgage debt 

that can be deducted in half. While $500,000 might buy the most 

expensive house in some of your districts, in my own market, in 

Southern California, it might buy a starter home. Homeowners in 

high-cost markets already pay a higher percentage of their income 

for housing than those in less expensive parts of the country. This 

proposal would make home ownership even more expensive in markets where affordability is already a problem. 

Finally, we have heard proposals to change the deduction to a 

tax credit. While this discussion of credits versus deductions may 

make for great debate, the bottom line for current homeowners is 

this: If you are in a tax bracket higher than the credit amount, a 

credit will cause your taxes to go up and the value of your home 

to go down. 

Housing has helped lead us out of four of the last six recessions, 

and it appears to be doing so again. Americans are regaining confidence in real estate. Demand is increasing, and so are home 

prices. The greatest hurdle to full recovery in housing is uncertainty here in Washington. 

The mortgage interest deduction, along with other tax provisions, 

makes sustainable home ownership more affordable for millions of 

middle-class families who are the backbone of America. Congress 

must remember this as it pursues tax reform, and first, do no 

harm. I look forward to answering your questions. Thank you very 

much. 

[The prepared statement of Mr. Thomas follows:] 


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Chairman CAMP. Well, thank you, Mr. Thomas. 

Mr. Dietz, you are recognized for 5 minutes. 

STATEMENT OF ROBERT DIETZ, ASSISTANT VICE PRESIDENT 

FOR TAX AND POLICY ISSUES, NATIONAL ASSOCIATION OF 

HOME BUILDERS, WASHINGTON, DC 

Mr. DIETZ. Thank you for the opportunity to testify today. My 

name is Robert Dietz, and I am an economist with the National Association of Home Builders. NAHB represents all sectors of residential real estate development, single family, multifamily, remodeling, and businesses connected with supplying and financing those 

activities. 

Homebuilding is an industry dominated by small businesses, so 

the idea of a simpler, less complex Tax Code has great appeal. At 

the same time, our industry remembers painful lessons from the 

1986 Tax Reform Act when the commercial and multifamily sectors 

experienced a downturn due to unintended consequences. For this 

reason, we urge you to be cautious and thoughtful when it comes 

to housing and tax reform. 

We have seen over the last 5 years the influence housing can 

have. When housing fares well, it is positive for the economy. The 

year 2012 was a year of expansion off of great recession lows, but 

recent data, such as NAHB’s measure of builder confidence, has 

suggested the recovery will have starts and stops. In particular, the 

share for some home buyers remains below historic norms. 

Given the state of the industry, I would like to highlight a few 

key tax issues. NAHB strongly supports the Low Income Housing 

Tax Credit. Created in the 1986 reform effort, it is the most effective tool for the creation of affordable rental housing. Utilizing a 

public-private partnership to attract investment, the tax credit has 

created over 2 million affordable rental units. The needs for such 

housing remain significant and we strongly urge the Committee to 

protect this program. 

Also, the completed contract rules in Section 460(e) are essential 

to homebuilders and offer a case in point about tax reform. Absent 

this fix to changes made in 1986, many builders would need to pay 

taxes on homes prior to sale. 

However, when it comes to housing, the spotlight typically falls 

on the mortgage interest deduction, or MID. A few thoughts. First, 

we frequently hear few homeowners benefit from the MID because 

itemization is required. In fact, most homeowners will claim it. In 

2009, for example, 35 million taxpayers claimed the MID out of 50 

million homeowners with a mortgage. This means, of homeowners 

with a mortgage, 70 percent claimed the MID in that year. And 

typically more than 80 percent of mortgage interest paid by homeowners is reported as a deduction. Over the course of a homeowner’s time of ownership, the majority will claim the MID for 

years at a time. 

It is also claimed that the MID encourages the purchase of a 

larger home. These claims ignore the role of family size. The data 

show that larger families see a larger benefit, which is intuitive 

with the notion that families with children require larger homes. 

Also, the cost of housing varies greatly across the Nation, so what 

may appear to be a large deduction may reflect a modest home. 


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Moreover, the MID and the real estate tax deductions are two of 

the few elements in the Tax Code that account for differences in 

cost of living. Indeed, the real estate tax deduction is an important 

reminder that homeowners pay over $300 billion in property taxes 

each year. This fact is often ignored in Federal tax debates, because these taxes are collected by State and local governments. 

There is also a connection between the age of a homeowner and 

the resulting benefit of the MID. As a share of household income, 

the largest deductions are for those 35 and younger. This makes 

sense, because these are the homeowners that are paying more interest in the early years of a mortgage. 

Given this demographic connection, NAHB believes that any policy change that makes it harder to buy a home or that delays the 

purchase of a home will have a significant impact on the wealth 

accumulation and makeup of the middle class. 

Now, a few thoughts on the MID rule for second homes. While 

many think of expensive beach property, such homes are often 

owned free and clear or rented, which excludes them from the MID. 

In practice, the second home deduction is important for many who 

do not think of themselves as owning two homes. For example, the 

second home deduction facilitates moving when owning two homes 

during the tax year. The second home MID rules also permit existing homeowners to claim interest on a construction loan for a future home being built. 

Repeal of the second home MID rules would affect large sections 

of the country in nearly every State. There would be negative economic consequences in terms of lost home sales, home construction, 

and lost tax revenues. 

How housing is treated in any future tax reform will shape the 

economy going forward. This is particularly important now. Housing provides the momentum behind an economic recovery, because 

homebuilding and associated businesses employ such a wide range 

of workers. Housing could be a key engine of job growth that this 

country needs. 

As the Committee moves forward on tax reform, NAHB wants to 

be a constructive partner. Thank you, and I look forward to your 

questions. 

[The prepared statement of Mr. Dietz follows:] 


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Chairman CAMP. Thank you very much. 

Mr. Moran, you are recognized for 5 minutes. 

STATEMENT OF THOMAS F. MORAN, CHAIRMAN AND MANAGING PARTNER, MORAN & COMPANY, CHICAGO, IL, ON BEHALF OF THE NATIONAL MULTI HOUSING COUNCIL AND 

THE NATIONAL APARTMENT ASSOCIATION 

Mr. MORAN. Thank you. Chairman Camp and Ranking Member 

Levin, the National Multi Housing Council and the National Apartment Association would like to thank you for this opportunity to 

testify on the multifamily industry’s priorities for tax reform. 

My name is Tom Moran. I am the Chairman of Moran & Company from Chicago. I have been in the multifamily business for 40 

years. My firm operates nationwide. We develop, own, manage, and 

sell apartments. I happen to also be a CPA and a lawyer, and I am 

acutely aware of the critical tax issues confronting our apartment 

industry. 

The apartment industry builds vibrant communities by offering 

housing choices. Currently, there are 19.3 million apartment units 

with 35 million residents, which contribute $1.1 trillion annually to 

the economy and helps support nearly 26 million jobs. The demand 

for apartments continues to grow thanks to the changing demographic. Harvard University research shows that half of all the 

new households formed this decade could be renters, which is up 

to 7 million. Home ownership has declined from 69.2 percent to 

65.5 percent in December of 2012. A 1 percent change in home 

ownership represents approximately 1.1 million new apartment 

households. 

The demand for apartments is surging, but supply is not keeping 

up. We need to build at least an estimated 300,000 to 400,000 units 

per year, yet last year we delivered only 158,000 units. 

Like many small businesses, the apartment industry has a considerable stake in tax reform. We ask that tax reform take special 

care not to harm the thousands of existing real estate businesses 

which provide housing for 35 million residents. 

First, we believe that tax reform must be comprehensive and encompass both individual and corporate taxes, but done at the same 

time. 

Second, more than 75 percent of all real estate businesses are 

formed as partnerships or LLCs, which are flow-through entities 

where the owners and individuals are taxed individually each year 

at ordinary income tax rates except in the year of sale. These entities set forth the risk and obligations of the operating partner, the 

financial obligations of the investing partners. These documents 

are extensively negotiated and are an integral part of the real estate industry as well as other small businesses. Tax reform should 

not affect the way that business is transacted in the future, and 

the current regulations pertaining to capital debt and bases should 

not be changed. 

Third, the carried interest proposal as drafted should not apply 

to real estate since real estate developers and owners take substantial risks in developing and rehabbing real estate. They take development risks in buying the land, zoning the property, and guaranteeing the construction costs. They take financial risks in securing 


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a construction loan with a 100 percent construction guarantee and 

a 25 percent payment guarantee. They have investor risk. If you 

do not find an investor, you can lose your entire investment. If you 

secure an investor, he will receive a negotiated return and recoup 

his investment prior to any return on the carried interest. 

The current interest proposals do not have a current effective 

date. It applies to all buildings and partnerships retroactively. 

Thus, if you have owned a building for 30 years and have a substantial profit, primarily due to cost inflation, the carried interest 

proposal would be retroactively recharacterizing the capital gain to 

ordinary income. This retroactive recharacterization of ordinary income is most unfair and would cause transactional havoc in partnerships, where the general partners would be taxed at 40 percent 

and the limited partners at 20 percent. Real estate developers take 

the risk, create the jobs, and should be taxed at lower capital gain 

rates, the same as founder shares and other capital assets. 

Tax reform must retain 100 percent deduction for business interest. Real estate buildings are expensive and debt is a major portion 

of the capital stack. Thus, interest is an ordinary and necessary expense of doing business. 

Fourth, we must protect and make permanent the Low Income 

Housing Tax Credit, since Harvard is currently estimating that we 

have a shortage of at least 3 million affordable units. 

Fifth, tax reform should respect and not change the estate tax 

legislation enacted in January of this year. 

Finally, we strongly support extending and modifying the 179 

energy provisions by enabling more properties to qualify for the incentive. 

On behalf of the apartment industry and our 35 million residents, we thank you for the opportunity to testify today and we 

look forward to answering any questions you may have. 

[The prepared statement of Mr. Moran follows:] 


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Chairman CAMP. Well, thank you, Mr. Moran. 

Mr. Moss, you are recognized for 5 minutes. 

STATEMENT OF ROBERT MOSS, SENIOR VICE PRESIDENT, 

BOSTON CAPITAL, BOSTON, MA, ON BEHALF OF THE HOUSING ADVISORY GROUP 

Mr. MOSS. Chairman Camp, Ranking Member Levin, Members 

of the Committee, thank you for inviting me to appear today to discuss the Low Income Housing Tax Credit. My name is Bob Moss 

and I am the Senior Vice President for Affordable Housing at Boston Capital, a real estate finance and investment firm that raises 

capital for investment in affordable rental housing. I am here today 

also on behalf of a broad coalition of over 450 State, national and 

local affordable housing organizations, the Affordable Rental Housing Action Campaign. 

The housing credit is a bipartisan product of tax reform and a 

permanent feature of the Tax Code. Today the housing credit is 

generally recognized as the most successful housing production and 

preservation program. The housing credit is actually two programs. 

First, it is a capped tax credit program where States receive an annual amount of tax credits based on their population, and second, 

it is a bond credit program which combines fewer tax credits with 

tax-exempt multifamily bonds. 

One of the essential elements of the housing credit program is 

the role that State housing finance agencies play in administering 

the program. States annually prepare and publish qualified allocation plans that lay out State housing needs and priorities after soliciting public input through a transparent and open process. 

Our Nation is experiencing a crisis in affordable housing. This is 

not a new crisis, but it has grown worse in recent years. One quarter of all renters pay half or more of their income in rent. Nearly 

two-thirds of extremely-low-income household renters pay at least 

half of their income in rent. And the reason low-income households 

face such high rent burdens is the shortage of affordable housing. 

On average, State housing finance agencies receive applications annually for more than twice as much housing credit as they have 

available. 

Federal priorities have a major impact in how States run their 

housing credit program. And while the statute permits targeting to 

households with incomes up to 60 percent of area median income, 

according to a recent study by the Furman Center at New York 

University, the program in fact reaches much further down the income scale, where the need is greatest. 

Since the housing credit program was established in 1986, it has 

made possible the development of more than 2.5 million rental 

homes. Each year about 100,000 new rental homes are developed 

or preserved under the program. This program also accounts for 

95,000 jobs annually. This produces almost $8 billion of local income through wages for workers and profits for small businesses, 

and about $1 billion in taxes and other revenues for local governments. 

The housing credit serves the full spectrum of housing need, 

including housing for families, seniors, people with special needs, 

veterans, and the homeless, in all geographic areas. Many local 


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governments have used the housing credit over the years to spark 

neighborhood revitalization and help restore blighted areas. 

There are several key elements of the program that have led to 

its success. First, State housing finance agencies administer the 

program. This ensures that properties are developed according to 

local housing needs. Second, the private sector provides market discipline. And, third, the housing credit program is well designed 

within the Internal Revenue Code. Tax credits are not earned until 

the development is completed, it is in operation and housing qualified residents. This means that real estate construction and other 

risks are borne by the private sector, not the Federal Government. 

This threat of recapture imposes a powerful discipline on the program that ensures the properties are properly underwritten at the 

outset and diligently managed throughout the compliance period. 

Housing would not be built or preserved but for the capital contributed because of the housing credit. It is a safety net program that 

requires continued Federal support. 

This Committee did great work in 1986 when it created the housing credit. You designed a critically important program to maximize its efficiency, ensure investment occurs where it is needed the 

most, and harness private sector business discipline to achieve an 

important public policy objective. 

I thank you for the opportunity to address you today. Thank you. 

[The prepared statement of Mr. Moss follows:] 


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Chairman CAMP. Well, thank you. Thank you all very much. 

Mr. Thomas, this is directed at you. What is the biggest hurdle 

for people when they are buying a home? Is it having enough for 

the downpayment, especially now that we moved away from the 

zero-down loans that really helped fuel the subprime mortgage crisis? Is it interest rates? Is it some other factor, in your opinion? 

Mr. THOMAS. Well, it depends on the time of which you are 

speaking. If you are speaking of today, it is probably downpayment, 

because leaders are requiring more downpayment on loans other 

than FHA or VA, and so you have a bigger hurdle with the downpayment. 

Chairman CAMP. All right. 

Mr. Dietz, any comment on that? Is that your thought as well? 

Mr. DIETZ. The downpayment is a challenge. Labor market stability, wage growth, as the previous panel mentioned. Appraisals 

are a serious challenge. You can qualify for a mortgage, but if the 

appraisal comes in and says the home is inconsistent with where 

the appraisal is, then the sale falls through. And that is a problem 

for building as well as for home buyers. 

Chairman CAMP. All right. Just to sort of educate me and the 

Committee about the actual real estate market, what percentage of 

the market is first-time home buyers? 

Mr. THOMAS. It is generally about a third. At the present time 

it may not be quite that high because there has been such an influx of investor buyers, and so it has forced a lot of the first-time 

home buyers out of the market, because they are having to compete 

for homes. It is very difficult. In my own area, we have a 1-month 

supply of homes, and so the first-time home buyer is really at a disadvantage. 

Chairman CAMP. Sure. And what percentage would be so-called 

second homes? And is that obviously in regions of the country—— 

Mr. THOMAS. Sure. 

Chairman CAMP [continuing]. You know, second homes probably 

make up a larger portion of that. 

Mr. THOMAS. Like in yours. 

Chairman CAMP. Yes. Especially in the northern part. 

Mr. THOMAS. Correct. 

Chairman CAMP. Just in general, though, I mean. 

Mr. THOMAS. Typically it is about 10 percent. 

Chairman CAMP. All right. What percentage of that secondhome market is, as I think some of you said, and I think you said 

in your testimony, people that are, say, maybe moving and they 

have two homes or they are getting ready for retirement and they 

buy a second home 5 years before they are going to retire? What 

percentage of that second-home market is that sort of—— 

Mr. THOMAS. Unfortunately, we don’t have statistics based on 

exactly what that is, but we know that as people are moving across 

the country or even within a given area, that this is a factor. But 

there are a lot of people that do buy second homes in anticipation 

of retiring into them, so that is a big percentage. 

Chairman CAMP. That is what I was wondering about. 

Mr. THOMAS. Yeah. 

Chairman CAMP. And in terms of home values, how do home 

values break down nationwide? I mean, what are between, say, 


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zero and 100, 100 to 200, 200 to 300? Do you have that, or if not, 

can you get that to me? 

Mr. THOMAS. I can get it to you. 

Chairman CAMP. All right. 

I wondered, Mr. Moss, if you just wanted to comment on the previous panel. There was a lot of testimony about the incentives in 

the Low Income Housing Tax Credit and maybe it should go more 

to the individual as opposed to the way it is structured now. I don’t 

know if you had a chance to think about that and if you had any 

comment on that. 

Mr. MOSS. Well, in looking at—— 

Chairman CAMP. You may want to hit your microphone. 

Mr. MOSS. Sorry. 

If you look at most of the tax credit properties right now, in 

terms of achieving deeper targeting, they do. If you look at the 

Furman Center study and the type of targeting that is going on 

across the country, most tax credit properties are not just set at 60 

percent of area median income. They serve levels at 40, at 30 percent of median income. So there is some targeting going on there 

that would not be achievable under any other program. And especially with the private capital coming in to leverage these properties, it is not achievable under any other type of spending program. 

Chairman CAMP. In terms of the supply of low-income housing, 

is it in a shortage all over the country or are there regions that 

that is less the case? 

Mr. MOSS. The universe of affordable housing, when you start 

to talk about all the population types, is dramatic. As I mentioned 

in my testimony, we are now doing a lot of housing for veterans, 

returning veterans. There is a shortage. There is a great shortage 

of affordable housing in the United States in all areas. The nice 

and the great part about the credit is it is flexible and it can serve 

to provide housing for a lot of different housing types. 

Chairman CAMP. I guess I didn’t ask that the right way. Are 

there areas of the country where the need is greater than others? 

Mr. MOSS. Certainly in higher population areas where there is 

more employment, there is probably more of a need. But also you 

have to remember that the bond program serves as a useful tool 

in those areas as well, not just the capped credit. And you are 

going to see that there is, if you look at the credits across the country with the per capita allocation formula, there is very little that 

spills over into the national pool that is unused, if any at all. 

Chairman CAMP. Mr. Thomas, what is your view on the 28 percent cap in the President’s budget? 

Mr. THOMAS. We don’t support that. We think that is going to 

raise the rate for many people as to what they actually pay. So it 

has generally a detrimental effect. 

Chairman CAMP. All right. 

Mr. Dietz, do the Home Builders have a position on that? 

Mr. DIETZ. We are opposed to the 28 percent cap, too. And just 

to add an item, you know, something you don’t see discussed a lot 

is that the proposal has grown over time as it has appeared in the 

President’s budget proposals year by year. It now includes the SecVerDate Sep 11 2014 09:01 Jan 26, 2017 Jkt 021124 PO 00000 Frm 00187 Fmt 6633 Sfmt 6602 I:\WAYS\WAYSPS\21124\21124.XXX 21124

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tion 199 deduction, which would affect a lot of pass-through businesses, other exclusions. So that is an issue. 

Chairman CAMP. All right. Thank you. 

Mr. Levin is recognized. 

Mr. LEVIN. Welcome. You know, I think it is so important for 

us to dig out the facts, and I think what you have testified to helps 

us. 

I am not in favor of the status quo. I am also not in favor of 

changes that don’t take into account the realities. For example, second homes, Mr. Chairman, I think you and I might agree, I–75 people come up your way on Fridays, and I try to move up I–75 in the 

suburban area. And when you take into account who is traveling 

up I–75 from Detroit and suburban Detroit up north, my guess is 

I think a lot of them are going to small second homes. And I think 

we simply need to be careful about our proposals. 

I also think, though, that we need to make sure that we are not 

opposed to everything. The 28 percent proposal of the President relates to some of the facts that came out earlier, and that is, who 

is benefiting, who is taking advantage of accessing the deduction. 

And in terms of numbers, the largest numbers by far are people 

under $200,000. It is also true that proportionately a very substantial amount goes to people in higher income brackets. And so I 

think we just need to take a hard look at that. 

Also, I think we would welcome you, if you don’t have time 

through my questions, to take a look at the testimony of others before you, because, for example—by the way, Mr. Moran, I am not 

going to ask you questions about carried interest, because it doesn’t 

really relate directly to this hearing. The carried interest issue covers more than real estate. So let’s have that discussion some other 

time. Okay? We have been working hard on it and want your 

views. So many people take risk of all kinds, and they pay ordinary 

income tax on the benefits. Sometimes they don’t receive any benefits from the risky economic effort. 

But I think it would be useful if you would take a look at the 

testimony that came before. And it was really striking, Mr. Toder, 

if I pronounced his name correctly, on page 7 has this paragraph: 

‘‘Some empirical research and observations confirmed this lack of 

a relationship between the MID and home ownership rights.’’ 

I think you need to look at testimony like this and give us further indications as to the relationship. For example, I think maybe 

it was you, Mr. Renacci, I am not sure, who said that when people 

buy a house they don’t look at what their mortgage payment will 

be in terms of taxation. I find that somewhat hard to understand. 

I would think most people who are going to itemize if they buy a 

house would take note of what their monthly payment really would 

be on their mortgage. I think all of us do that all the time who 

have mortgages. 

So I think it would be useful for you to take a look at the testimony that came earlier—and thank you for your patience—and 

give us your views on that. 

And the same on low-income housing, because while the testimony has been basically positive, I am afraid that there may be 

suggestions that we would significantly change that. And I am not 

in favor of the status quo, but I think going after these important 


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policies, it is not a loophole, the Low Income Housing Tax Credit, 

it is a policy adopted by this country on a bipartisan basis, and I 

think we better be careful before we significantly tamper with it. 

My time is up. But give us your further ideas. Go back over the 

testimony that we heard earlier and give us any comments, if you 

would. 

Chairman CAMP. All right. Thank you. 

Mr. Johnson is recognized. 

Mr. JOHNSON. Thank you, Mr. Chairman. 

I would like to start with Mr. Thomas and Mr. Dietz, if you don’t 

mind. On July the 11th, the Joint Committee on Taxation issued 

a report on the tax treatment of household debt, and in that report 

there is a chart which shows a surge in home mortgage debt from 

around 2002 through 2007. I asked them about that at a hearing 

we had back in July a couple years ago, and I wanted to share with 

you what Joint Tax had to say in a followup letter addressed to me 

and get your reaction. 

According to Joint Tax, ‘‘Given that the home mortgage interest 

deduction has become less valuable over time, the deduction does 

not appear to explain the increase in home mortgage debt from 

2002 to 2007.’’ I would like to know your thoughts about this. First, 

Mr. Thomas. 

Mr. THOMAS. Well, I am not sure there is a correlation there. 

I think that the basics of having the mortgage interest deduction 

allows people to take that deduction and it allows for people to buy 

a home, especially a first-time home. 

You know, the thing that most people don’t understand is that 

you can’t take a snapshot at any one given time and get a clean 

picture of the people that are taking advantage of the mortgage interest deduction. It is really more like a movie, because the majority that take advantage of the deduction are younger and they are 

building their families and they are starting out, so that a greater 

portion of their income goes toward the debt of a home. And the 

mortgage interest deduction is very important to them, because it 

allows them to buy the size home they need in the community they 

are in. And that is all factored in when they apply for a loan, because the lender will look at what the mortgage deduction is going 

to do for them, and that allows them to purchase as much as they 

can. 

Over time, as they pay the mortgage down, the interest deduction is less meaningful, or if they pay their home off, or if they decide in later years to downsize. So all of those factors have to be 

taken into consideration. 

A lot of what we saw in the buildup during that period of time 

was really due to the price of housing. It had nothing to do with 

what the mortgage interest deduction did to it. It was really in the 

pricing of homes. 

Mr. JOHNSON. Mr. Dietz. 

Mr. DIETZ. I agree with the Joint Tax conclusion. When you look 

at the run-up in debt, the run-up in housing earlier in the decade, 

it was a lot of speculative bubbles, flippers and such. The way that 

the mortgage interest deduction’s benefits accrue are, as he mentioned, sort of life cycle, and so they are over a number of years. 

The MID is not going to fuel a speculative bubble. 


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And if you want a cross-country comparison, an experiment, so 

to speak, you can look at when we had housing bubbles in a number of countries around the world. They obviously don’t have the 

same tax laws that we do, so, you know, it is hard to make a connection between the two, so I think Joint Tax is correct. 

Mr. JOHNSON. Well, I thank you for that. 

Mr. Thomas, and also Mr. Dietz, I wanted to get your reaction 

to some points made by a couple of the witnesses on the first panel. 

Two of them, Eric Toder from the Tax Policy Center and Mark 

Calabria from Cato, both argue the mortgage interest deduction 

has really no effect on home ownership. I would like to know your 

thoughts on that. 

Mr. THOMAS. Well, I would greatly disagree with that. I think 

that it does affect home ownership. If you look at Great Britain, 

which is just in the process of reducing the mortgage interest deduction, the average homeowner entry level into home ownership 

is now advanced by 7 to 8 years, so it means that they are delaying 

home ownership by 7 to 8 years. A lot of that is due to the fact 

that they can’t deduct their mortgage interest anymore. 

We think we would have the same problem. So we think that 

there is quite a correlation there. 

Mr. JOHNSON. It makes it cost more to get in it, doesn’t it? 

Mr. THOMAS. Absolutely. 

Mr. JOHNSON. Yeah. 

Mr. DIETZ. I agree. I think it is not only an impact on the home 

ownership rate, the number of home-owning households in the 

country, but the timing of when they become homeowners. And 

that 7 years, using the United Kingdom as a good example, those 

are big years in terms of family events, household formations, marriage, children, and most importantly wealth accumulation over a 

long period of time, because home ownership is a vehicle for accumulating family wealth. 

Mr. JOHNSON. You know, the Tax Policy Center also argues 

that the mortgage interest deduction encourages upper-middleclass households to buy larger and more expensive homes. Cato 

makes a similar argument, in that the benefits of deductions are 

highly concentrated among both the highest income and mostly leveraged household. I would like your thoughts on that. 

Chairman CAMP. Yeah. Just briefly, please. 

Mr. THOMAS. Well, again, if you look at the statistics in our 

written testimony, that is contrary to what we have, which is that 

the vast majority of the benefit goes to people that are under 

$200,000 in income, and that a high percentage goes to those earning under $100,000. 

Chairman CAMP. Thank you. I do think we have to be careful 

in our comparisons to England, because they have large chunks of 

their country where you cannot get fee simple, you can only get a 

long-term lease, and that is a very different sort of model than we 

have in the United States. 

Mr. Rangel is recognized. 

Mr. RANGEL. Thank you so much, again, for your patience and 

for sharing your views with us. 

I was intrigued by Congressman Johnson’s question as relates to 

the connection between mortgage interest deduction and purchases. 


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About 10 years ago, or whatever time it was, in Miami, Florida, 

and throughout Florida, there seemed to be an overdevelopment of 

luxury condos, and there was the worry that wealthy people in 

New York could get a condo at a reasonable price without any 

downpayment based on the tremendous mortgage deduction that 

they would enjoy and the fact that there was continuous rapid appreciation of the property. 

Does that concept make any sense, that they wouldn’t need a 

downpayment, just go down and buy a million-dollar condo based 

on that concept, appreciation and deductibility? 

Mr. THOMAS. Well, I think a lot of them did it because of their 

anticipation of appreciation. However, that makes no economic 

sense. No, it never did. And the type of lending that was allowed 

at that time, we don’t want to see that again. So, you know, those 

were not good elements that went into buying a property. Those 

were not wise investments, obviously. 

Mr. RANGEL. Yeah, but I think if they still own the property 

and it did appreciate, I doubt whether they didn’t pay any downpayment, but, you know, these wealthy people get together and 

share with each other the great economic ventures that they have 

had. And I am asking, is it possible that this could have happened, 

no matter what it looked like, that wealthy people could acquire 

property without any downpayment just based on appreciation and 

the fact that the tremendous monthly payments were—the interest 

was deductible and most of the early payments are interest and not 

principle? 

Mr. THOMAS. The majority of them are interest in the early 

months of—— 

Mr. RANGEL. Yeah. 

Mr. THOMAS [continuing]. Early years of a mortgage. 

Mr. RANGEL. Yeah. 

Mr. THOMAS. Absolutely. 

Mr. RANGEL. And so isn’t it logical that those who did it, 

whether it is bad economics or not, if they still have those places, 

notwithstanding the fact that they have leveled off, that at that 

time it seemed like a good deal and it was? 

Mr. THOMAS. Well, at the time they purchased it, I am sure 

they thought it was a good deal. 

Mr. RANGEL. No, no. I didn’t ask what they thought. They did 

it. But I don’t know what happened to them since then. 

Mr. THOMAS. Well, a lot of those properties dropped in value 

dramatically. 

Mr. RANGEL. Okay. Let me get to the question of carried interest. I assume because you get a favorable and much lower rate 

with capital gains, that all of you would support it. I am trying to 

figure out why. What work would you do that would be different 

from anybody else that is not investing in the project so that their 

income would be an investment on capital, and therefore they gain, 

where other people, especially in the venture capital area, who do 

the same type of work, get taxed at a much higher rate because 

it is ordinary income? 

So with the real estate, recognizing that you take a risk, it is my 

understanding that anyone who opens a business or takes a position hoping that the business would increase is taking a risk. But 


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what makes the real estate industry different so that their profits 

should be treated differently than someone that is being taxed at 

an ordinary income rate? Mr. Thomas. 

Mr. MORAN. Well, I am not sure they should be treated differently than somebody else taking the same type of risk, but the 

risk that we take in the real estate industry in building buildings, 

as you know, you are buying land and you are taking the risk on 

the land, you have to get it zoned, you are getting it zoned, you 

have to go hire architects, you hire lawyers, and you try to put 

your package together. And once you have spent a lot of money to 

put all that together, the key point is, are you generating an economic return that somebody will invest in? And if somebody doesn’t 

invest in it, then you are going to lose all your money. 

Mr. RANGEL. But they would be the investor. 

Mr. MORAN. Pardon me? 

Mr. RANGEL. The investor would be the person that you are 

turning it over to. 

Mr. MORAN. No, no. I am not turning anything over to the investor. 

Mr. RANGEL. You don’t keep the property—— 

Mr. MORAN. The investor is coming to me because I have the 

asset. He is looking to make a return on his money. And I am the 

one that is going to take all the risk to build the project, to go get 

the bank loans, to guarantee everything. 

Mr. RANGEL. Are all of you satisfied with—— 

Mr. MORAN. And the only thing the investor would—— 

Chairman CAMP. Well, I—— 

Mr. MORAN. Pardon me? 

Chairman CAMP. I think time has expired, but—— 

Mr. RANGEL. I just want to know. 

Chairman CAMP. I think, Mr. Thomas, we want to hear your answer on this, too, so we will make an exception here. 

Mr. RANGEL. You are a good Chairman. 

Chairman CAMP. I will remember that, Charlie. 

Mr. THOMAS. Well, we actually agree with the other speaker, 

and that is that this is something that we do a lot of work for. In 

many cases we forgo our commissions to put into the project, and 

so therefore we are invested in the project just like anybody else. 

It just doesn’t mean that we write a check out of it. I guess we 

could if we took the commission and then turned around and put 

it back in. But there are rationales for making it the same as the 

investor. 

Chairman CAMP. All right. Thank you. 

Ms. Jenkins is recognized. 

Ms. JENKINS. Thank you, Mr. Chairman. 

As I am sure you are all aware, this Committee has spent the 

last 2 years having hearings and releasing discussion drafts, and 

we have been meeting with stakeholders from every industry to 

build a foundation as we seek to achieve what others have warned 

us is a nearly impossible feat of giving our constituents a simpler 

and fairer Tax Code. 

Mr. Thomas, in your testimony I read that the effect of the 1986 

Act had an effect on the real estate industry. Can you just elaborate for us on what lessons the Committee Members can draw from 


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the last time we overhauled the Tax Code as it concerns the real 

estate industry? 

Mr. THOMAS. Well, what it did to the commercial arena is that 

it really negatively affected prices and the exchange of property 

through that Tax Code change. So if you look at that as history and 

see that it decimated that particular industry and what it did to 

savings and loan institutions at the same time, you realize that is 

the negative effect that you are going to see or could potentially see 

if you did the same thing on the mortgage interest deduction. 

Ms. JENKINS. Okay. 

Yes, Mr. Moran. 

Mr. MORAN. May I respond to that question? On the 1986 Tax 

Act there were two things that were very, very detrimental to the 

commercial part of the business. One of them was retroactive. So 

a lot of people had made investments 2 or 3 years prior anticipating they would receive certain income tax deductions and the 

law would remain the same. Obviously, it did not. It changed. 

But the major change that caused all the problems was the passive loss rules. What happened is all the capital was coming into 

the commercial industry and all of it was coming into the apartment industry from individuals. That was your source of capital. 

And when you passed the passive loss rules and they couldn’t take 

any of their deductions and they were making all these investments, therefore what we told them when they went in, we couldn’t 

deliver, because the law changed. 

But the passive loss rules have taken the individual out of the 

market. Therefore, he wasn’t supplying capital. Therefore, you had 

a recession from 1986 to 1994 before we started getting transactions going again and capital coming back into the business. And 

it started coming back in through the REITs and through the pension fund advisors, so you had two other types of entities. 

Today, for example, individuals are still not investing in real estate because of the passive loss rules. When you get to small towns 

and you get to secondary and tertiary towns where people in those 

towns used to invest in real estate, they don’t do it because of the 

passive loss rules. Not only was it devastating between 1986 and 

1994, you can still feel the effects today because you are saying 

where is the capital going to come from to help us fund our businesses? 

Mr. DIETZ. One more thing. As I mentioned in my testimony, 

the completed contract rules were another example in the 1986 Act 

where a change was made and a fix had to be made 2 years later. 

It is a reminder in general that real estate, the tax rules manifest 

themselves in the value of real estate. And so any impact on housing, for example, you get a 1 percentage point drop in housing 

prices today, it is going to destroy about $177 billion of net worth. 

You only need a 6 percent decline from where we are today to destroy a trillion dollars. So housing and the tax rules are very much 

connected. 

Ms. JENKINS. Okay. Great. The first panel today discussed 

some recent options that have been proposed as part of major tax 

reform, drafts to reform our tax policy as it relates to housing 

policy and promoting home ownership. Today’s testimony noted 

that recent major tax reform proposals, including Simpson-Bowles, 


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President Bush’s 2005 Tax Reform Advisory Panel, and the Bipartisan Policy Center have all recommended moving from an interest 

deduction to a tax credit. And I understand that these proposals 

are concerning to some of you and potentially threaten our recovering housing industry. 

So could you just share with us, has the housing industry conducted any analysis on what these policies—what effect they would 

have on home prices? 

Mr. DIETZ. The real problem with the housing credits we have 

seen as a replacement for the MID is that the rates are so low they 

become nonstarters. A 12 percent rate is the most common. A revenue neutral tax credit would be something like 20 percent. So 

when it is down at 12 percent, you are really looking at a big tax 

hike for homeowners. 

In terms of price impacts, the impacts are going to be the largest 

in those high-cost areas. Where the average income is higher, the 

marginal income tax rate is going to be higher, so that represents 

a larger tax hike. 

Ms. JENKINS. Okay. I yield back. 

Chairman CAMP. Thank you. 

Mr. McDermott is recognized. 

Mr. MCDERMOTT. Thank you, Mr. Chairman. Mr. Moss, see, I 

come from Seattle where we spend a lot of effort politically passing 

initiatives for low-income housing and we have passed levies on almost a continuing basis for the last few years to build housing. So 

we have a lot of low-income housing that is managed by a variety 

of public agencies in some instances, and sometimes private nonprofits are running them. And we have Section 8 going on in our 

State like everybody else does. 

Tell me, from your point of view, the place where we ought to 

put our emphasis on low-income housing. Where should the money 

go if you are going to be the most effective? Is it in government 

building houses as we did before Ronald Reagan or is it in the lowincome tax credit stuff in 1986 and thereafter or is it in Section 8? 

Because I see us coming to a point where we are having more 

and more old people in this society who are going to be looking for 

housing as they are forced out by taxes and other things. I am trying to figure out for the community where is the most effective— 

or what is the most effective way to put the housing up? 

Mr. MOSS. Well, first of all, starting in 1986 when the tax credit 

was put in place, the low-income housing tax credit, it started to 

replace all the failed Federal programs that had gone on prior to 

that time, programs that did not have the private sector involved, 

that did not have the private sector with risk in the game. 

And, today, the low-income housing tax credit is the highest performing real estate class in the United States of any real estate 

class because of the private sector involvement, because of the 

State agencies doing the oversight and the underwriting and assessing housing need, and due to the nature of the type housing 

that is being built, which is very high-quality housing. 

The programs from the past, the Federal programs, are now 

being preserved using the low-income housing tax credit. They are 

being regenerated by bringing in the private sector. 


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Mr. MCDERMOTT. You mean you are taking the old federally 

built ones and turning them into low-income housing tax—— 

Mr. MOSS. Yes, sir. We are bringing in the investors, renewing 

the projects, making sure that the units are rehabbed in a sustainable fashion so they will last another 40 years. It is a very important role that the credit plays, in that it can play every position 

on the team. It can really fix rehab—housing that needs rehab, 

Federal housing, it can do new construction, it can build housing 

for those individuals that have disabilities. It can build veterans 

housing. It is a very, very flexible program. I hope that answers 

your question. 

Mr. MCDERMOTT. There is one in Seattle named the McDermott 

Place which has 54 homeless veterans living in it, so I know about 

how it is done. But you didn’t say anything about Section 8. Where 

does Section 8 fit in all of this? 

Mr. MOSS. Well, Section 8 is not an operating new construction—production program. 

Mr. MCDERMOTT. I know it doesn’t produce, but it is a way of 

saying you haven’t got a house, so here is a voucher. Go find someplace in the private sector that will take it. Is that a more effective 

way than building and operating it as low-income housing? 

Mr. MOSS. No, I don’t believe it is. I believe that having the private sector involved—— 

Mr. MCDERMOTT. The private sector is involved in Section 8, 

aren’t they? 

Mr. MOSS. They can be, where the project receives project-based 

funding or vouchers to support extremely low incomes which support the debt service for the property. But those Federal programs 

also had subsidies for debt when the properties are redone and 

rehabbed under the tax credit program. It is at conventional debt 

rates and the vouchers and the subsidy provide subsidy to the 

renter, not to the property. 

Mr. MCDERMOTT. What do you think the deficit is—excuse me. 

Go ahead. 

Mr. MORAN. On the Section 8 question, I agree. When prior to 

1985 we did several projects and those projects were Section 8- 

based projects, that was when passive losses were not a limitation, 

so we had all private capital doing those. We still have those properties today and those investors are happy with that investment 

over all the years, but they needed the passive loss rules in order 

to get that deduction in order to bring that capital into the business. Project-based Section 8 works better than vouchers. 

Chairman CAMP. Mr. Renacci. 

Mr. RENACCI. Thank you, Mr. Chairman. I want to thank the 

panel for being here today. This morning I was talking with the 

earlier panel about simplification, how we have to make this 

program simpler, because that person that comes in with just a 

W–2 needs to be able to get their return done without a professional. As I said, I was a professional, I had a CPA practice for 

many years prior to coming here. 

On the other hand, I also indicated there are some people that 

aren’t even aware that the interest deduction helps them, although 

it does, because of the complications of the Tax Code. And I think, 


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after everything, they found out that the interest deduction was 

helpful to them. 

But one of the interesting comments in the earlier panel was 

somebody had indicated that repealing the mortgage interest deduction would reduce home prices by roughly 13 to 15 percent. Any 

comments on that? I thought that was an interesting number. 

Mr. THOMAS. Well, our number is very similar. The number 

that our economist has come up with is about 15 percent. That 

would be devastating to this economy if we were to do that. Do you 

understand what that would do, putting that many more people 

under water, that would increase the number of foreclosures again. 

It would blow way out of proportion. We believe it would throw the 

country back into a recession. So that would be devastating if it 

were 15 percent. 

Mr. DIETZ. Our numbers are—it is smaller, but similar. You 

could have dueling economists, what is the right price effect? It is 

going to differ by area, it is going to be larger in high-cost areas. 

But the big thing is it will impact. And I mentioned before, for 

every 1 percentage point, it is about $177 billion off of household 

net worth. If you are talking 15 percent, you are talking up to a 

$2 trillion windfall loss for homeowners. 

Mr. RENACCI. Mr. Moran, President Obama has proposed lowering the corporate tax rate to 28 percent. I heard in your testimony not only are you a CPA but you represent an industry that 

has a lot of partnerships and LLCs. What would you say to those 

who advocate for doing corporate tax reform only and how would 

it affect your members? 

Mr. MORAN. Our position has always been we are looking for 

comprehensive tax reform and to do both the corporate and the individual at the same time, because there would be crossovers on 

certain provisions. And we don’t think one should be penalized— 

to bring down the rate over in the corporate, we shouldn’t penalize 

the individual. So I think it should be looked at at the same time. 

We are not averse to the rate coming down. We think the rate 

should come down overall, because on a competitive basis to bring 

money into the United States we need to have a global rate that 

makes sense. And our global rate is higher than that of other people. 

Mr. RENACCI. But you are saying corporates, LLCs, partnerships should all be looked at as one corporate rate? 

Mr. MORAN. No, no, no, I do not say that. There is 2.5 million 

partnerships in this country. They control about $12 trillion of assets. They generate $400 billion a year in income. And all of those 

partnerships are there for a reason. There are different people putting up money. There are different people taking risks and they are 

allocated differently. So they don’t run like corporations. 

Mr. RENACCI. I understand that, but when we look at corporate 

tax reform, I am saying we should be looking at all the entities? 

Mr. MORAN. Yes. 

Mr. RENACCI. One other question. Mr. Thomas, this is for you 

but others can answer. The Tax Code currently allows deduction 

for interest on mortgages up to $1.1 million. Do you think that is 

appropriate? What is an appropriate level? 


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Mr. THOMAS. I think it is appropriate because of the area in 

which I live and work. So, obviously, I think it is appropriate. It 

is taken where it is needed. Across the country there aren’t that 

many people that go all the way up to the maximum. But, again, 

in my particular area, $500,000 buys a starter home. If you were 

to reduce the limit down to $500,000 that is going to negatively affect most of the coastal areas of the country where the prices are 

much higher. So it would have a negative effect. 

Mr. DIETZ. In addition to high-cost areas, you could also have 

stocking issues. If you have multiple home ownership, for instance 

someone who is about to retire and they have one home where they 

work and one home where they plan to retire soon, two they own 

simultaneously, that limit is for both mortgages, both homes under 

Section 163. 

Mr. RENACCI. Mr. Chairman, I yield back. 

Chairman CAMP. Mr. Neal. 

Mr. NEAL. Thank you, Mr. Chairman. Just a quick comment 

based on previous experience in terms of dealing with Section 8s. 

It is the saturation point on Section 8s that begin to change neighborhoods, it is the concentration of Section 8s. I think that is one 

of the challenges, because as I pointed out to the other panel, there 

are few issues that are more complex in urban economics than 

housing. In the experiments we had in the 50s and 60s with many 

of our veterans coming back, it worked very well. And then as the 

housing grew much older and there was less money to keep it up 

to date, in old cities landlords began to walk away from properties. 

And one of the phenomena during those years was abandonment. 

For those of us who had to deal with that abandonment issue, it 

was very significant because we had great difficulty tracking down 

the landlord. And I think having the private sector involved in 

helping to discipline the aspects of the marketplace is terribly important. 

Mr. Moss, I am surprised that you mentioned the shortage of affordable housing. And it is always important I think to use the 

term ‘‘affordable housing,’’ because the connotation of low-income 

housing, again, is that you are going back to high-rise developments and that you are going back to a concentration of Sector 8s. 

But you mentioned that there is a shortage of affordable housing 

in your testimony. Would you speak to that issue, please? 

Mr. MOSS. Yes, the Harvard study that was most recently 

published, the report showed that only four eligible low-income 

households out of ten were finding an apartment that achieved affordability for them. Four out of ten. So there are six households 

out of ten that cannot find an apartment where their rental costs 

are 30 percent of their monthly income or less. They are paying 50 

percent, 60 percent of their monthly income in rent. And so the 

rent burden is tremendous in this country. 

The Harvard report demonstrates that, sir, and also the recent 

Bipartisan Policy Housing Center report. 

Mr. MORAN. One of the confusing things—on affordability, we 

need to define it. Some people say affordability is 80 percent of the 

median income. And if you do 80 percent of the median income, 

like the apartment industry, 90 percent of the available housing is 

affordable. The low-income, where you can only afford to pay 50 or 


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60 percent or 40 percent of the median income, is where the real 

problem is. So it is the low-income which needs to be subsidized 

and needs to have the credits and needs to have the Section 8s if 

that gap that is currently there is going to be closed. 

Mr. NEAL. But I also think it is fair to say that management 

is a key issue. 

Mr. MORAN. Yes. 

Mr. NEAL. On how those units are managed. 

Mr. MORAN. Yes. 

Mr. NEAL. If you get some first-class management teams nobody 

would even know it is affordable housing or subsidized housing. 

And then if you get a bad management team that simply accepts 

the subsidy and walks away from the property when things start 

to go south for them on their other investments, and that is frequently what happens, they stop any sort of upkeep to the property. And I think we need to be mindful of that. 

How would you strengthen the low-income credit? I have been a 

supporter of new markets and low-income housing credits. I think 

it works. How would you propose strengthening the option? 

Go ahead. 

Mr. DIETZ. Your bill with Mr. Tiberi that—— 

Mr. NEAL. I was hoping you would say that. 

Chairman CAMP. I don’t see a prompt here, do I? 

Mr. DIETZ. Without that the credit rate on the tax credit falls 

and it results in 18 percent less equity in the deal. So fixing that 

rate ensures that a sufficient amount of equity is available, because 

this is a production program. And we heard in the earlier panel, 

economists like vouchers in theory. But vouchers don’t help build 

the property. They help allocate the demand after the fact. This 

program is really useful in the sense that it provides safe affordable housing on the production side. 

Mr. NEAL. Thank you, Mr. Chairman. 

Chairman CAMP. Thank you. I will go to Mr. Blumenauer and 

then we will close with Mr. Griffin. 

Mr. BLUMENAUER. Thank you very much. I appreciate the special emphasis that several of you have made in terms of the lowincome tax credit. I think it is important to drive that home when 

there is so much in flux. I would just put three things on the table 

because you all represent groups that have certified smart people 

and it might be useful to get a little context and feedback from you. 

So I will put the three and then I will get out of your way. 

One, you may have heard comments that I made earlier about 

the impact of the Federal Tax Code subsidizing people who live in 

areas that are frequently prone to disaster, and in fact some of 

them are in areas that by Federal law were not supposed to provide infrastructure support from the Federal Government. Yet we 

are subsidizing, for example, on a second home and then after we 

pay Federal money to help clean things up, then they go right back 

and are able to qualify for a deduction. And I would appreciate it 

if, again, this might be something that some of your certified smart 

people might be able to help us with in terms of some feedback. 

The second deals with strengthening the provisions—I have long 

felt comfortable with the notion of having the capital gains exclusion for residential real estate, because nobody paid it except the 


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dumb, the distressed, or the divorced. But there have been instances that have been described to me where people use the provisions under current law where it is two out of the five, but they 

use it to sort of serially flip, bouncing back and forth with a residential property and switching that advantageously to be able to 

serially harvest the capital gains exclusion. It is not something that 

is a long-term residence that they are a part of. If you have some 

thoughts, or if there is some smart person there that could give us 

a written response, it would be appreciated. 

The final question that is of interest to me is, today, the extent 

to which residential property represents people’s retirement security. Notwithstanding the fact that a lot of folks are under water 

and they are up and down, but we are watching pensions disappear, we are watching 401(k)s become 201(k)s, we are watching 

a number of people tapping early retirement because of financial 

problems. They are retiring early with Social Security. They are 

taking things out of their 401(k)s, their IRAs. If you could help us 

identify the role you think residential property plays in retirement 

security going forward, it would be something that I would be very 

interested in. 

Mr. DIETZ. On the gain exclusion in 2008 in HERA, the Housing 

Economic Recovery Act, there was a change made in Section 121 

to address that two of five provision. And it was a change that was 

supported by the industry at the time. It stipulates that you can’t 

claim the gain exclusion for years in which you don’t use the property as your primary residence. So someone who is using it for 

speculation or an independent landlord or owning it for a long period of time—— 

Mr. BLUMENAUER. My question is, is that tight enough to prevent people from intent to reside being able to game the system? 

Mr. DIETZ. And on the third issue that you raised, we have papers and research on the importance of housing wealth. It did take 

a big hit. Household net worths declined 40 percent. Polling surveyed consumer finances from 2000 to 2010. But recent price gains 

have begun to repair that, and, obviously, for those reasons the 

housing tax incentives will go in the opposite direction. 

Mr. BLUMENAUER. Thank you, Mr. Chairman. I would just 

welcome any of those little papers that you have in those areas. 

Mr. THOMAS. Sure. On the first question that you had I might 

comment that is really a local land use issue. Because if authorities 

are going to continue to allow building there, people are going to 

continue to build. That is where the problem lies. 

We, as realtors, supported phasing out subsidized flood insurance 

last year. So, you know, we understand. 

Mr. BLUMENAUER. But if we get rid of the tax deduction it 

would be recommended. Thank you, Mr. Chairman. 

Chairman CAMP. Mr. Griffin is recognized. 

Mr. GRIFFIN. Thank you, Mr. Chairman. Thank you all for 

being here today. And I know that you all share our general goal 

of simplifying the Code and having a pro-growth Tax Code. There 

are certainly provisions in it that I know you favor. But we can all 

agree that it is a mess. And we are trying to make it better. 

You have—I assume you heard some of the folks on the first 

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stead of the mortgage interest deduction that we have. One of 

those proposed is some sort of credit. I would like to first hear from 

you four—whoever wants to speak—what your opinion is on the 

credit, and how it would impact what we consider middle-income 

Americans who rely on the mortgage interest deduction. 

Mr. DIETZ. The first problem with the credit is the rates. We 

saw a 15 percent rate proposed in 2005. A 12 percent rate proposed 

by recent commissions, including the Bowles-Simpson commission. 

That rate is so low compared to the marginal tax rates, which is 

still the comparable value, that it reports a significant tax hike for 

homeowners. 

So the question is who are the winners and who are the losers? 

There might be some winners, but we most definitely know who 

the losers would be moving to that kind of credit from the existing 

deduction. It would be young folks who have to use a mortgage to 

buy a home in high-cost areas. 

Mr. GRIFFIN. I think that it is fair to say and I think you would 

agree with this, that credits suggested or changes suggested also 

assumed that marginal tax rates are changed. And some of the 

analysis that I have seen or heard of the credits—and we discussed 

this a little bit with the earlier panel—assume that you have to 

have some sort of change in that marginal tax rate. 

Can you comment on it? Because clearly if you took the marginal 

tax rate down to a high of 25 percent, for example, clearly that is 

going to be favorable to people like me who count on the mortgage 

interest deduction, along with a lot of middle-income Americans. So 

how does that change in any way your analysis? 

Mr. DIETZ. Pro-growth tax policy that creates jobs, would raise 

wages and make the economy grow faster. That is good for housing. 

But, as you say, there are a lot of assumptions. And, for example, 

one of the assumptions with moving to a tax credit is what happens to the real estate property tax deduction? The proponents always focus on the MID to a tax credit, but they don’t explain, well, 

we assume the property tax deduction is completely eliminated. 

That could also reduce the value for home buyers. 

Mr. GRIFFIN. Is there anyone else that wants to comment on 

that? Okay. I thank you all for being here. 

Quickly, I think I have another minute, there was a comment 

made on the previous panel that the mortgage interest deduction 

incentivizes debt as opposed to equity. Do you have any comment 

on that? 

Mr. DIETZ. My reaction when I hear that is, people don’t take 

out debt to make money. You pay interest; it is a cost. Mortgage 

interest deduction offsets the cost of that debt. The question is who 

needs debt to buy homes? Well, it is particularly younger households and, in fact, our research has shown the primary beneficiaries of the mortgage interest deduction with shared household 

income, is younger households that need the mortgage to buy a 

home. If you get rid of it, prices are going to fall and who wins? 

Cash buyers, investor buyers. That is not good policy for a stable 

middle class. 

Mr. THOMAS. Yes, and I would also say that increasing the debt 

and the amount that you pay on that debt, you are not getting that 


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entire amount back in a tax benefit so the law doesn’t really encourage you to take on more debt. 

Mr. GRIFFIN. Well, I think we are all looking very carefully at 

this because we understand that whatever changes we make are 

going to have an impact, positive or negative, on a lot of Americans 

that count on this that are having a hard time making ends meet 

anyway. But we are focused on having a simpler, fairer Code that 

encourages economic growth which will benefit us all. 

Thank you all for being here today. It was really thoughtful and 

we appreciate it. 

Chairman CAMP. Thank you. We do have one more questioner, 

Mr. Young, and then we will conclude the hearing. 

Mr. YOUNG. Thank you, Mr. Chairman. It has really been a 

very informative hearing here. I thank all our panelists for appearing here today and for delivering your testimony. 

Earlier, we had a panel where we received testimony that a disproportionate share of the home mortgage deduction benefits go to 

taxpayers in the largest metropolitan areas. One witness testified 

that 20 percent of the tax benefit is claimed by taxpayers in California. 

First, do you have any reason to believe that that testimony was 

incorrect? And, if not, then do you have concerns about this? Concerns about the disparate benefits between geographic areas and 

between types of communities across our country as reflected in the 

Tax Code? 

Mr. DIETZ. You know, the mortgage interest deduction obviously 

is on a nominal dollar basis more valuable in high-cost areas. But, 

as I mentioned in our testimony, that is actually one of its merits 

in the sense that it is one of the elements, one of the few elements 

in the Tax Code that does account for differences in the cost of living. Property tax deduction is the same way. You want an incentive 

that encourages young home buyers to be able to buy in high-cost 

areas. Why are they high-cost? They are high-cost because they 

have dense concentrations of population. That is where things are 

growing. That is where wages are growing. And if you shut out 

those younger home buyers from those kinds of markets, that is 

going to have a distinct economic impact. 

Mr. THOMAS. And those areas are obviously very, very concentrated in numbers of households and so you are going to have 

a disproportionate share. The number of households in California 

is much higher than in most of the rest of the country anyway. So 

you are going to have that effect. Plus, just the sheer cost of building in those areas produces higher costs. 

Mr. YOUNG. If there is no other thoughts or perspectives on 

that, I thank you again and I yield back. 

Chairman CAMP. Is the 20 percent accurate? 

Mr. THOMAS. I don’t know that it is. We would have to do research on that. That seems awfully high. 

Chairman CAMP. I want to thank this panel. You have been an 

excellent panel. And I appreciate your views and your perspectives 

and, obviously, as I have said, tax reform is a critical issue to this 

Committee and we remain committed to moving forward in an open 

and transparent manner. And your participation today is obviously 

a very important part of that process. 


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I would ask that you promptly respond in writing to any areas 

where that was requested or would be appropriate, and as we prepare the formal hearing record we will make those written submissions a part of that. So, again, thank you very much for being here. 

The Committee stands adjourned. 

[Whereupon, at 1:05 p.m., the Committee was adjourned.] 

Æ 


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