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77–019—PDF 2011

S. HRG. 112–641 

TAX REFORM OPTIONS: 

INCENTIVES FOR HOMEOWNERSHIP 

HEARING 

BEFORE THE

COMMITTEE ON FINANCE 

UNITED STATES SENATE 

ONE HUNDRED TWELFTH CONGRESS 

FIRST SESSION 

OCTOBER 6, 2011 

( 

Printed for the use of the Committee on Finance 

COMMITTEE ON FINANCE 

MAX BAUCUS, Montana, Chairman 

JOHN D. ROCKEFELLER IV, West Virginia 

KENT CONRAD, North Dakota 

JEFF BINGAMAN, New Mexico 

JOHN F. KERRY, Massachusetts 

RON WYDEN, Oregon 

CHARLES E. SCHUMER, New York 

DEBBIE STABENOW, Michigan 

MARIA CANTWELL, Washington 

BILL NELSON, Florida 

ROBERT MENENDEZ, New Jersey 

THOMAS R. CARPER, Delaware 

BENJAMIN L. CARDIN, Maryland 

ORRIN G. HATCH, Utah 

CHUCK GRASSLEY, Iowa 

OLYMPIA J. SNOWE, Maine 

JON KYL, Arizona 

MIKE CRAPO, Idaho 

PAT ROBERTS, Kansas 

MICHAEL B. ENZI, Wyoming 

JOHN CORNYN, Texas 

TOM COBURN, Oklahoma 

JOHN THUNE, South Dakota 

RICHARD BURR, North Carolina 

RUSSELL SULLIVAN, Staff Director 

CHRIS CAMPBELL, Republican Staff Director 

(II) 

C O N T E N T S 

OPENING STATEMENT 

Page 

Conrad, Hon. Kent, a U.S. Senator from North Dakota ...................................... 1 

WITNESSES 

Breaux, Hon. John B., senior counsel, Patton Boggs, LLP, Washington, DC .... 1 

Case, Dr. Karl ‘‘Chip,’’ professor of economics emeritus, Wellesley College, 

and senior fellow, Joint Center for Housing Studies, Harvard University, 

Wellesley, MA ....................................................................................................... 5 

Dietz, Dr. Robert D., assistant vice president for tax and policy issues, National Association of Home Builders, Washington, DC ..................................... 7 

Green, Dr. Richard, director, Lusk Center for Real Estate, University of 

Southern California, Los Angeles, CA ................................................................ 10 

Nelson, Gregory M., vice president and assistant secretary, PulteGroup, Inc., 

Bloomfield, MI ...................................................................................................... 12 

ALPHABETICAL LISTING AND APPENDIX MATERIAL 

Breaux, Hon. John B.: 

Testimony .......................................................................................................... 1 

Prepared statement .......................................................................................... 29 

Case, Dr. Karl ‘‘Chip’’: 

Testimony .......................................................................................................... 5 

Prepared statement .......................................................................................... 33 

Responses to questions from committee members ......................................... 42 

Conrad, Hon. Kent: 

Opening statement ........................................................................................... 1 

Dietz, Dr. Robert D.: 

Testimony .......................................................................................................... 7 

Prepared statement .......................................................................................... 46 

Responses to questions from committee members ......................................... 69 

Green, Dr. Richard: 

Testimony .......................................................................................................... 10 

Prepared statement .......................................................................................... 76 

Hatch, Hon. Orrin G.: 

Prepared statement .......................................................................................... 90 

Nelson, Gregory M.: 

Testimony .......................................................................................................... 12 

Prepared statement .......................................................................................... 93 

Responses to questions from committee members ......................................... 97 

COMMUNICATIONS

Center for Fiscal Equity .......................................................................................... 99 

National Association of Realtors (NAR) ................................................................. 102 

Weyerhaeuser Real Estate Company ..................................................................... 113 

(III) 

(1) 

TAX REFORM OPTIONS: INCENTIVES 

FOR HOMEOWNERSHIP 

THURSDAY, OCTOBER 6, 2011 

U.S. SENATE, COMMITTEE ON FINANCE, Washington, DC. 

The hearing was convened, pursuant to notice, at 10:02 a.m., in 

room SD–215, Dirksen Senate Office Building, Hon. Max Baucus 

(chairman of the committee) presiding. 

Present: Senators Conrad, Wyden, Nelson, Cardin, Hatch, Grassley, Snowe, and Coburn. 

Also present: Democratic Staff: Russ Sullivan, Staff Director; Lily 

Batchelder, Chief Tax Counsel; Ryan Abraham, Tax Counsel; and 

Jonathan Goldman, Law Clerk, Tax. Republican Staff: Tony 

Coughlan, Tax Counsel; Jim Lyons, Tax Counsel; and Maureen 

McLaughlin, Detailee. 

OPENING STATEMENT OF HON. KENT CONRAD, 

A U.S. SENATOR FROM NORTH DAKOTA 

Senator CONRAD. The committee will come to order. 

I want to advise everyone, the chairman and the ranking member are engaged in the China currency bill, and of course our chairman in the special committee dealing with the debt. They will be 

here, but we have a vote at 10:30, so we want to start so that we 

can accommodate our witnesses. We thank them all for being here. 

We believe this is a very important hearing, talking about Tax 

Reform Options: Incentives for Homeownership. We deeply appreciate the participation of the witnesses here today. We believe you 

will make a valuable contribution to the work of the committee on 

this important issue. 

With that, we are going to begin with our former colleague, Senator Breaux. We are delighted that you are here. Senator Breaux 

was a member of this committee, a very valuable member not only 

of this committee, but of the U.S. Senate. We miss him. It is good 

to have him back. 

Welcome, Senator Breaux. Please proceed. 

STATEMENT OF HON. JOHN B. BREAUX, SENIOR COUNSEL, 

PATTON BOGGS, LLP, WASHINGTON, DC 

Senator BREAUX. Thank you very much, Mr. Chairman and Senator Wyden. I am glad to be back. Senator Grassley was here; give 

him my regards as well. It is an honor to come back to the Finance 

Committee where I had the great privilege of serving for about 15 

years. 

2 

I think sitting from the outside and looking at this committee, 

I can really say that this is truly the greatest committee in the 

Congress. I say that based on the ability of this committee to work 

together across party lines. 

When I was here, this committee did NAFTA, this committee did 

the SCHIP program, this committee did welfare reform, this committee did the prescription drug benefit under Medicare. While either side could have blocked the other side from achieving any of 

those accomplishments, this committee was able to breach the 

party lines and come up with substantial reform on things that 

made a big difference. 

When we talk about tax reform, I think that now is the time, and 

this is the committee that can put it together better than any other 

place. If this committee cannot do it, I do not think any committee 

has the capacity to do it. 

Right after I got out of the Senate, President Bush asked me and 

Connie Mack, two former members of this committee, to chair the 

Tax Reform Simplification Commission. We met for over 10 

months. We had hearings in five cities all across the country. We 

had countless meetings here in Washington, and we produced a 

product that had to be progressive, it had to be simple, it had to 

be fair, and I think we accomplished that. 

I want you to know that after we finished—I still have the book. 

After we finished, I got this note written by our good friend John 

Snow. In the front of the book he said, ‘‘John, thanks for your great 

work. Now it’s up to us. John Snow.’’ Well, after we did that report, 

I think they put it in a hermetically sealed box and locked it up 

and threw away the key and buried it somewhere underneath the 

Capitol dome, and no one wanted to touch it. 

We were able to succeed in part because none of us on the panel 

was running for reelection. We had some great tax experts, and a 

couple of ex-politicians, and we were able to make these tough recommendations because we did not have to fear the political liability 

of getting clobbered with these recommendations. 

We did some serious things. Number one, we recommended that 

the personal income tax exclusion for employer-provided health insurance, where you get the premium and you do not count it as income, should be capped at the level of the average plan. If you 

want to buy a Cadillac plan, the government should not have to 

subsidize it. So, we made that recommendation. 

Second, we said that the payment of State and local taxes should 

not be deductible on your Federal income tax. Someone in North 

Dakota should not have to be paying for someone in Beverly Hills 

who has 24-hour-a-day police protection, fire protection, underground lighting, and all the things that they get because they pay 

high local taxes, but your State is subsidizing. So we recommended 

you should not be able to do that. 

We also changed the Mortgage Interest Deduction. We did not 

eliminate it, but we changed it. Now, those were tough things to 

recommend. That is probably why they put it in a lockbox. But 

with that, we were able to lower all the rates across the board: 35 

percent became 33, 33 became 28, and right across the board. And 

corporate taxes we were able to lower from 35 percent to 30, and 

we eliminated the Alternative Minimum Tax. So it is a trade-off. 

3 

If you are going to do some of these hard things, you can use it 

to do good things on the other side, and that is why I thought that 

our package was balanced. 

Let me talk a little bit about the specific housing tax incentives. 

If you add up all the housing tax incentives, it is about $140 billion 

a year. The total amount of tax we take in is $1 trillion or $1.1 

trillion a year. If you eliminated it completely, this suggests you 

could lower the rates by somewhere between 12 and 14 percent 

across the board for individuals. 

We are not recommending that, but that is how large these benefits are. And the other fact is that most people do not get the mortgage deduction benefit. Seventy percent of tax filers do not get it 

because they do not itemize; it goes to a relatively few number of 

people who itemize their deductions. 

What we recommended is that the deduction should not be eliminated. We did not want to eliminate incentives for homeownership, 

although I would point out that many countries like Australia, 

Canada, and the U.K. do not have a mortgage deduction for housing, and their housing ownership rates are about the same as ours, 

and in some cases a little bit higher, even though they do not have 

the deduction. 

We did not recommend eliminating it, but we recommended 

changing it. What we did was say, number one, instead of a 100- 

percent deduction, you would get a home tax credit. The home tax 

credit would be capped. The credit would be available to all taxpayers, not just to those who itemize. Everybody would get the 

home tax credit, and it would be 15 percent of the mortgage interest payment that you have been paying on your home mortgage on 

your housing debt. 

We also limited the credit to the average price of a single family 

home in the United States, and adjusted it for a county-to-county 

basis. They do that already. IRS does it; FHA figures out those 

numbers, and those numbers are readily available. So we said a 15- 

percent tax credit, and it would be capped on interest payments on 

the average mortgage in the area that you happen to live in. 

Back in 2005 when we issued our report, the top amount would 

be about a $415,000 home. And interestingly enough, about 85 percent of the people then would not have been adversely affected by 

that cap. Given that caps already exist for the current deduction 

of mortgage interest and we need to decide what that cap should 

be moving forward, I would suggest that, if you use what we were 

recommending at that time, it would be equitable and available for 

all taxpayers. 

Further, if you were to ask someone in this country today whether they would take a lower interest deduction in return for a substantial reduction in their individual rates and their corporate 

rates, most people would say, yes, I will take that deal right now. 

So, I would just conclude by saying how much this committee can 

do to change the nature of the debate and get Republicans and 

Democrats to join hands and do what is best for the country. I 

thank you for your attention. 

[The prepared statement of Senator Breaux appears in the appendix.] 

4 

Senator CONRAD. Thank you, Senator Breaux. Let me just say to 

you, before I go to our next witness, that you may have thought 

that your recommendations were locked in a hermetically sealed 

box somewhere and never looked at, but on the Bowles-Simpson 

Commission we actually did very carefully review your recommendations. I think if you look at what came out of Bowles-Simpson, 

you can take real pride in that a lot of the ideas that you surfaced 

in your work were adopted by the Bowles-Simpson Commission. 

And by the way, those things are being very carefully reviewed by 

the special committee now. 

Senator BREAUX. Great. 

Senator CONRAD. So, you know, sometimes it is very frustrating 

around here because you do a lot of work to come up with ideas, 

and then you wonder if they ever see the light of day. I want to 

assure you, the work of your group really has seen the light of day. 

I believe at the end of this exercise, you are going to find a lot of 

the things that your group recommended will have been adopted, 

and we thank you for the extraordinary work that you, and the 

other members of that group, did. I think Connie Mack was part 

of your group, as I recall. 

Senator BREAUX. Co-chair. 

Senator CONRAD. So there are better days ahead. 

Senator BREAUX. Unlock the box. 

Senator CONRAD. Senator Wyden? 

Senator WYDEN. Because it is going to be tight for time, if I could 

just make one quick comment apropos of that. 

Senator CONRAD. Yes, sir. 

Senator WYDEN. I, too, want to commend Senator Breaux for his 

outstanding work. I remember, after you all offered up your report, 

you and Senator Mack were here, and we talked about where you 

would go in the days ahead, and we asked you specifically about 

the viability of the principles of 1986, where you go in there and 

clean out a boatload of these preferences, use those very same dollars to hold down marginal rates, and keep progressivity. 

Like Chairman Conrad, I happen to think that those ideas which 

you and Connie Mack said were still valid when you did your report, still as valid as in 1986, I think they are going to be right 

at the center of the next major tax reform, and I want to commend 

you. Thank you, Chairman Conrad, for the opportunity to make 

that statement. I again commend Chairman Baucus for this ongoing series of hearings. 

Senator CONRAD. Thank you. We should thank you, Senator 

Wyden, because I will tell you, there are very few Senators who 

have done more to come up with comprehensive proposals of tax reform than Senator Wyden, and he is not a committee chairman, so 

he does not have the staff. 

Yet he and Senator Gregg, and now Senator Wyden with Senator 

Coates, have come up with a comprehensive tax reform proposal 

that also heavily informed the work of the Fiscal Commission and 

heavily informed the work of the Group of Six. So, you know, 

again, sometimes you wonder, is any of this stuff ever going to actually happen? I honestly believe, before it is done, what you, Senator Breaux, did with Connie Mack and your group, what Senator 

5 

Wyden, Senator Gregg, now Senator Coates have done, really will 

form the basis of what ultimately happens. It really has to happen. 

With that, we will go to our next witness, Dr. Karl Case, professor of economics emeritus of Wellesley, and senior fellow, Joint 

Center for Housing Studies at Harvard. Welcome, Dr. Case. Very 

good to have you here. 

Please proceed. 

STATEMENT OF DR. KARL ‘‘CHIP’’ CASE, PROFESSOR OF ECONOMICS EMERITUS, WELLESLEY COLLEGE, AND SENIOR 

FELLOW, JOINT CENTER FOR HOUSING STUDIES, HARVARD 

UNIVERSITY, WELLESLEY, MA 

Dr. CASE. Thank you, Mr. Chairman. I want to second and third 

the work of this committee over the years. I was standing out in 

Gucci Gulch outside here, thinking of the Tax Reform Act of 1986 

and what an incredible story it was, when Senator Packwood and 

Dan Rostenkowski and the President got together, and they said, 

distributionally neutral, they said revenue-neutral, and let us do it. 

It took Treasury I, which was a beautiful document that died because of some of the things that were suggested, and turned it into 

the greatest piece of tax legislation ever passed. So I want to add 

my thanks. 

I have to talk fast because no economist can say anything in 5 

minutes, but I am going to do my best. 

Let me start by outlining a couple of major provisions that I need 

to include to make the rest of my comments clear. First of all, a 

major part of the yield on investment in a house comes in the form 

of housing services that it produces over time. If you are a landlord 

and you rent a house to a tenant, the rent that you are paid, net 

of maintenance and taxes, is part of your income, part of the yield 

on your investment. It also is treated as taxable income. But now, 

if you buy a house and live in it outright, you get paid an income 

flow. It does not show up as a transaction, but it is an income, and 

it comes in the form of valuable services which we call imputed 

rent. 

Now, it is not taxable. Some people cringe when you raise the 

topic of imputed rent, and I understand why. But if you think 

about it, it is an investment that, if you make it, you get a 6- 

percent dividend which is indexed for inflation, in real terms, it 

cannot be taken away as long as you maintain the house, and it 

is guaranteed. In real terms and inflation-adjusted, that is what a 

house is, if you buy it with no taxation of imputed rent. You would 

think I were crazy if I told you I had an investment like that. 

But it is not going to be changed. No one is going to tax imputed 

rent—despite the fact that taxation of imputed rent is the one bigticket item in all the things that are on the plate today—no way 

in this world is anybody going to pass taxation of imputed rent. 

And people would go crazy if you did, so that is basically off the 

table. 

But a number of other specific subsidies directly aimed at housing are written into the tax code that have to be viewed in the context of keeping that imputed rent from being taxed. A number of 

other specifics include, of course, the homeowner deductions for 

mortgage interest and property taxes. They are a flag that goes up 

6 

and gets people very worked up, and I suspect you will hear some 

of that from me today. 

So, if imputed rent were taxed, it would be appropriate to allow 

the deduction for the cost of earning income, which means you 

would take the financing expenses and interest off, if imputed rent 

was taxed, but we allow you to have an interest deduction even 

though the imputed rent is not taxed. 

Also, the property tax, let us take a look at the property tax really quickly. You can view the property tax in two ways. First of all, 

as a tax which is paid that reduces your disposable income, and 

taxing it without allowing deductibility would be, in fact, taking 

away income you never really received. It is never really received 

if you do not allow it to be deducted. 

But, in fact, the other way of viewing it is as the price we pay 

for local public services. It determines the price we pay for local 

public services. If you look at the property tax as a payment for 

things we might want, obviously making it deductible could expand 

the demand for local public services because it is below cost. 

Should homeowners receive preferential treatment? Just let me 

touch on that argument in general. If a house were like any other 

investment, the principle of neutrality would apply. Differential tax 

treatments can lead to distortions that impose excess burdens. We 

all know that. By the way, in your report there is a beautiful primer on tax policy that you guys wrote that was just—I use it in 

class. It is terrific. 

Senator BREAUX. I needed the primer. 

Dr. CASE. So a subsidy to owner-occupied housing can of course 

lead people to own who otherwise would not. It could lead people 

to buy bigger and more expensive homes, to over-leverage. Those 

who say we need this subsidy to housing, favorable treatment is 

justified by external benefits in the form of public goods. Homeowners are more likely to maintain their property, be more attracted or attached to their communities, and so forth. Richard 

Green has done some work on that measure. It is legitimate work. 

But on the other side, one of the arguments for not reducing subsidies, at least in the short run, is it would be a major blow to an 

important sector of the economy that is already reeling from a catastrophic series of events. 

Right now the housing market is almost in unbelievable shape. 

I was talking just a few minutes ago about giving a talk to the 

Joint Center for Housing Studies a couple of years ago, back in 

1986. They wanted to throw me out for saying that the starts were 

going to go below 1.5 million. In fact, they have now been below 

700,000 for 34 consecutive months. That is an 80-percent reduction 

in the product of that industry, and it is very painful, as we all 

know. It has led to contagion. 

We have a clogged pipeline of foreclosures, roughly 10 million 

properties under water. There is great uncertainty about the interest rates as the government moves to transfer the risk that has 

been on Fannie and Freddie’s books and is going to have to be 

cleared off of there, and on the actual balance sheet of the Fed 

itself. 

Very low rates of household formation have shocked everybody, 

and, if you look at some of the numbers coming out, they could be 

7 

actually negative right now. That is what used to clear the market 

when you disentangled starts and household formations. Household 

formations were always up over 1 million. 

The bottom line in the housing market is this: during the period of 2000 to 2006, the Nation added about $5 trillion in new structures and $5 trillion in new land value to the balance sheet of the 

household sector. In the following 5 years it went away—$7 trillion 

of it went away—and we have not figured out who is going to bear 

that cost yet. 

So, in the short run, I would strongly recommend against any 

major potentially destabilizing changes to the housing market, but, 

in the long run, I do favor looking very seriously at the interest deduction and the property tax deduction. I agree with the conclusions of your committee on that, but I certainly have to admit I 

would not do it now. 

For the record, I just think that the methodology that was used 

for getting this thing through in 1986 is a model, and your following it, Senator Breaux, was also terrific. 

So, I almost made it. Thank you. 

Senator CONRAD. You did well. 

[The prepared statement of Dr. Case appears in the appendix.] 

Senator CONRAD. Dr. Dietz, the assistant vice president for tax 

and policy issues at the National Association of Home Builders, 

welcome. Thank you so much for being here. Please proceed. I do 

not imagine you will be endorsing imputed interest. [Laughter.] 

Dr. DIETZ. It is an interesting concept, and I hope actually we 

get to talk about it in Q&A, because there is a good connection to 

property tax. 

Senator CONRAD. I do not think we need to spend a whole lot of 

time on it. [Laughter.] 

Dr. DIETZ. All right. 

Senator CONRAD. It is not going anywhere. 

Dr. DIETZ. So get it out of the way. 

Senator CONRAD. Dr. Dietz, please go ahead. 

STATEMENT OF DR. ROBERT D. DIETZ, ASSISTANT VICE PRESIDENT FOR TAX AND POLICY ISSUES, NATIONAL ASSOCIATION OF HOME BUILDERS, WASHINGTON, DC 

Dr. DIETZ. Members of the committee, thank you for the opportunity to testify today. My name is Robert Dietz. I am an economist 

with the National Association of Home Builders. 

The Internal Revenue Code currently provides incentives covering both owner-occupied and rental housing, ranging from lowincome housing tax credits to the Mortgage Interest Deduction. The 

focus of this hearing is owner-occupied housing, and I will direct 

my testimony to those rules. 

In reforming the tax code in 1986, Congress maintained the popular home Mortgage Interest Deduction, or MID, for short. Recently, a number of misleading claims have been made concerning 

the MID, suggesting only a small number of high-income homeowners benefit from it. In fact, 90 percent of the people claiming 

the MID are homeowners with economic income of less than 

$200,000, and these households collect 70 percent of the tax benefit. 

8 

For taxpayers with AGIs less than $200,000, the Mortgage Interest Deduction is worth, on average, 1.76 percent of AGI. For those 

above $200,000, it is worth less, only 1.5 percent of AGI. These 

data show that the Mortgage Interest Deduction is a progressive 

middle-class tax break. 

Another misleading claim is that few homeowners benefit from 

the MID because itemization is required. This is false. Thirty-five 

million taxpayers claimed the MID in 2009 out of 75 million homeowners; however, of that 75 million, a third of those homeowners 

own their homes free and clear, but likely benefitted from the MID 

in the past. 

Senator CONRAD. Can you just repeat that? 

Dr. DIETZ. Sure. So in 2009 we had 35 million taxpayers who received a direct benefit. 

Senator CONRAD. Right. 

Dr. DIETZ. There are 75 million homeowners in the country. A 

third of those 75 million own free and clear. In other words, they 

have paid their mortgages off. 

Senator CONRAD. Yes. A third have no mortgage. 

Dr. DIETZ. Right. 

Senator CONRAD. Yes. 

Dr. DIETZ. And so, of the rest of the 35 million who benefit, that 

represents 70 percent of homeowners with a mortgage who claimed 

the MID and benefitted from that tax benefit. 

Senator CONRAD. All right. 

Dr. DIETZ. And, on average over the last 10 years, 86 percent of 

mortgage interest paid has been reported on Schedule A as a deduction, so most of the mortgage interest that is paid by homeowners with a mortgage shows up on Schedule A. Itemization does 

exclude some people. 

Senator COBURN. Is that by dollars or numbers? 

Dr. DIETZ. Seventy percent is the number of taxpayers, 86 is by 

dollars. 

Senator COBURN. All right. 

Dr. DIETZ. And, of those who do not benefit, in other words in 

that 30 percent of the 70 percent, most are older homeowners who 

are in the later years of a mortgage where you are paying mostly 

principal and relatively less interest. 

It is also often claimed that the MID encourages the purchase of 

a larger home. These claims ignore the role of family size. In fact, 

the IRS data show that larger families see a larger benefit, which 

is intuitive with the notion that growing families with children require larger homes and therefore claim a larger MID benefit. 

Moreover, the cost of housing varies greatly across the Nation, so 

what may appear to be a large deduction for a large home may reflect a modest home in a given area that has high costs. Indeed, 

the MID and the real estate tax deductions are two of the few elements of the tax code that account for differences in cost of living. 

There is also a connection between the age of the homeowner and 

the resulting benefit of the MID. We just talked about household 

formations. This is particularly important when we talk about 

younger home buyers. As a share of household income, I find that 

the largest benefit goes to those aged 35 and under. 

9 

This should make sense because these homeowners 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 delays the purchase of a home, 

will have a significant long-term impact on wealth accumulation 

and the make-up of the middle class. 

Perhaps the least understood rules of the MID involve second 

homes. While many think of expensive beach property, such homes 

are likely to be owned free and clear or rented, which excludes 

them from the rules of 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 principal residences within a tax 

year. 

The second home MID rules also permit existing homeowners to 

claim interest in a construction loan for a future residence. Nearly 

every State has areas with significant numbers of second homes. 

Forty-nine States have a county where at least 10 percent of the 

housing stock consists of second homes, and 26 counties in the 

country had 50 percent or more of the housing stock consisting of 

second homes. 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 price effects. Homeowners may also deduct interest on up to $100,000 of home 

equity loan debt. It is important to keep in mind that half of all 

home equity loans are used for remodeling. Remodeling and home 

improvement are important economic activities for a Nation with 

an aging housing stock. 

As we have mentioned, many in this committee can look back to 

the tax reform efforts in 1986 as a guide, and there are important 

lessons to draw from that experience. First, it is possible to achieve 

low tax rates and maintain strong incentives for housing. But in 

1986 we also saw a crisis in commercial real estate due to tax policy changes enacted at that time. 

How housing is treated in any future tax reform will shape the 

economy going forward. This is particularly important now, as Dr. 

Case explained. Home building usually leads the economy out of recession. After other post-World War II recessions, residential construction grew at an average rate of 30 percent in the first year of 

recovery. This time residential construction has grown at a lackluster 5 percent. Housing provides the momentum behind an economic recovery because home building employs such a wide range 

of workers. 

On average, construction of a single-family home creates three 

full-time jobs. Housing can 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 more questions. 

The CHAIRMAN. First, I apologize for being late. Second, I thank 

my colleague, Senator Conrad. Thank you very much, Dr. Dietz. 

[The prepared statement of Dr. Dietz appears in the appendix.] 

The CHAIRMAN. I suppose, Dr. Green, you are next. 

Dr. GREEN. I guess I am. 

10 

The CHAIRMAN. You are now. 

Dr. GREEN. Well, thank you. Thank you, Chairman Baucus. 

The CHAIRMAN. Have you been introduced? 

Dr. GREEN. I suppose I have not. 

The CHAIRMAN. Well, let me introduce you. You are Dr. Green. 

[Laughter.] 

Dr. GREEN. Yes I am. 

The CHAIRMAN. And you are the director of the Lusk Center for 

Real Estate at the University of Southern California. 

Dr. GREEN. That is correct. 

The CHAIRMAN. Why don’t you proceed? 

Dr. GREEN. All right. Thank you. 

STATEMENT OF DR. RICHARD GREEN, DIRECTOR, LUSK CENTER FOR REAL ESTATE, UNIVERSITY OF SOUTHERN CALIFORNIA, LOS ANGELES, CA 

Dr. GREEN. Thank you for the invitation to be here today. When 

I was listening to Senator Breaux worry about his work not being 

paid attention to, I could not help but think about the fact that I 

have been a professor for 21 years, and I have been writing about 

this stuff for about 21 years, and I feel like this may be the first 

time it has been paid attention to. So, I am really thrilled to be 

here today. 

The CHAIRMAN. Good for you. 

Dr. GREEN. I should also say that, as a Californian with a mortgage, I should, if anything, be a strong proponent of the Mortgage 

Interest Deduction. Nevertheless, my work of the last 21 years prevents me from doing so. 

Let me just make eight quick points. The first is, when the Mortgage Interest Deduction was created, it was not created as an instrument of housing policy; it was just interest, just like any other 

consumer interest that was deductible under the terms of the 1913 

tax code. With the Tax Reform Act of 1986, it was excluded as special relative to all other consumer interests, but I do not know that 

the analytics behind the saving of it at the time were particularly 

strong with respect to homeownership. 

Second, I do have to argue that those at the margin of home 

owning get little to no benefit from the Mortgage Interest Deduction. The issue is, again, itemization. Now, think about a homeowner in Texas who has a $100,000 house. You can get a $100,000 

house in Texas. There is no State income tax at all. The chances 

are they are not going to itemize. Let us put that homeowner in 

Wisconsin where there is a State income tax. Now they might 

itemize, but the value of the itemized deduction is going to be small 

relative to the standard deduction. 

The real issue is, does the policy, in a targeted way, encourage 

homeownership? I would argue that it does not. I have done stuff 

called regressions and simulations and so on, and, in my view, if 

the Mortgage Interest Deduction were removed, the long-term impact on homeownership rates would be pretty small. There would 

be an impact, but it would be in the area of 1 percentage point, so 

hardly catastrophic. 

On the other hand, I do actually think the Mortgage Interest Deduction encourages people to buy larger houses and therefore 

11 

moves money toward the housing sector and away from plant and 

equipment. And again this is not just an association, it is based on 

regression results that control for things like family size, control for 

things like location that a family lives in, control for things like 

marital status, and so on. When you control for all those things, 

you still find that tax policy encourages people to buy bigger houses 

than they otherwise would. 

We could have an argument about whether that is a good thing 

or not, but I think it should be pretty uncontroversial that it matters. We think incentives matter. The design of the Mortgage Interest Deduction is such that, the higher your income, the higher the 

benefit, because the higher your marginal tax rate is, the greater 

the encouragement is to take advantage of it and buy a larger 

home. 

That said, if the Mortgage Interest Deduction were removed, 

homeownership would still be heavily subsidized for reasons that 

my friend Professor Case mentioned, as I do not think anyone is 

proposing that we tax imputed rent. I actually would be against it 

on the grounds that I think taxes are something you should be able 

to explain to people who are being taxed, and I have been trying 

to explain imputed rent to students for 21 years now, and I seem 

to do a pretty lousy job of it. So, as a result of that, there will still 

be a real subsidy. 

One of the impacts of that subsidy would be that it would encourage people to pay off their mortgages faster because now you 

would have tax-preferred equity. You would not have tax-preferred 

debt, and so people would be encouraged to not hang onto their 

mortgages for quite as long. In work I did some years ago with Pat 

Hendershott, we found that in countries where there was no Mortgage Interest Deduction—Australia and Canada—while people 

bought their houses with mortgages that were about as big as 

Americans’, they actually paid off their mortgages more quickly in 

those other countries. 

This would lead, in my view, to greater stability. I think having 

households de-lever might be a good thing in the long term, but it 

also means we should recognize that the revenue benefits of eliminating or modifying the Mortgage Interest Deduction would be 

more modest than those that static estimates would suggest because, as people sell assets in order to pay off their mortgage more 

quickly, the tax revenue generated by the Mortgage Interest Deduction would be smaller than the roughly $105 billion that it is 

scored at right now. 

My reading of the literature suggests that that revenue benefit 

would be somewhere between 20 or 40 percent less than the static 

estimates. All that said, a couple of things. One, to follow up again 

on Professor Case’s point, the housing market is very weak right 

now and knocking underpinnings out from under it at the moment 

does not make a lot of sense. 

So I would suggest that, if one were to phase out the Mortgage 

Interest Deduction, that the phase-out not start until there was 

evidence that housing was in recovery. To me, that evidence would 

be that house prices were rising by at least the rate of inflation. 

One could use the Case-Shiller Index or the Federal Housing Finance Agency Index, or whatever you like, in order to do that. 

12 

The second thing for it to be an orderly—once the phase-out 

began it should be a phase-out. It should not be eliminated overnight. The way one could do this is by reducing the Mortgage Interest Deduction by $100,000 a year over a period of 10 years, at 

which point it would be phased out. 

But for all that, if it is determined that the tax code must subsidize homeownership, it would be far better to do what Senator 

Breaux has recommended, which is to use a credit which is independent of income in terms of the value of the tax benefit and that 

would be better targeted. As a result, I would take a refundable 

credit. It would be more sensible if the purpose of the tax code is 

actually to encourage homeownership. 

Thank you very much for this opportunity. 

The CHAIRMAN. Thank you, Dr. Green. 

[The prepared statement of Dr. Green appears in the appendix.] 

The CHAIRMAN. The next witness is Mr. Nelson. Mr. Nelson, I 

will introduce you as vice president and assistant secretary of 

PulteGroup. Is that right? How do you pronounce it? 

Mr. NELSON. Yes, sir. PulteGroup. 

The CHAIRMAN. PulteGroup. Thanks. Well, thank you very much 

for coming to give us your thoughts. Why don’t you proceed? 

First, I might say that a vote is occurring. What I might do, I 

suggest that—he’s not here now, Senator Wyden. But we will have 

a rolling attendance here, as we keep asking questions for you, but 

Senators will be coming and going over the next period of time in 

which we can ask questions. 

I will stay as long as I can, but then I will leave as soon as I 

get into the 15 minutes. But Senators, I urge you, if you want to 

come back, to leave now, and then come back and ask questions 

when I have to leave. 

Mr. Nelson? 

STATEMENT OF GREGORY M. NELSON, VICE PRESIDENT AND 

ASSISTANT SECRETARY, PULTEGROUP, INC., BLOOMFIELD, MI 

Mr. NELSON. Thank you, Mr. Chairman, Senator Hatch, and 

members of the committee, for inviting me to testify today. My 

name is Greg Nelson, the vice president of PulteGroup responsible 

for taxes and corporate real estate. Pulte, in its 60 years of history, 

has delivered more than half a million houses and is currently one 

of the Nation’s largest home builders. 

My testimony today will be focused on the Mortgage Interest Deduction, although many of my observations included apply also to 

other incentives for homeownership the committee is considering, 

such as the deduction for State and local property taxes. 

Today’s hearing takes place at a time when the Nation’s housing 

industry is mired in the 6th year of the worst housing crash since 

the Great Depression. Annual new home sales have crumbled from 

a recent peak of 1.3 million to less than 300,000 homes currently. 

While home prices have dropped to 10-year lows, erasing an estimated $7.4 trillion of wealth from the American people, the collapse of U.S. housing has in turn wiped out millions of construction 

jobs. Yet, even with this severe economic downturn, survey after 

survey demonstrates that the American dream of homeownership 

is alive and well. A recent survey this week suggested that as high 

13 

as 70 percent of renters and people who are on the sidelines want 

to own a house at some point. 

This committee’s work is to reform the Federal tax code, and it 

is certainly to be applauded. However, it is not hyperbole to say 

that elimination of the Mortgage Interest Deduction could, and 

likely would, have a cascading disastrous impact on the country, 

the economy, and the American people. 

Home prices have dropped, mortgage interest rates are approaching record lows, and the job market is stabilizing, yet would-be 

homeowners remain on the sidelines for fear that a home bought 

today will be worth less tomorrow. Eliminating the Mortgage Interest Deduction would quickly turn that fear into a reality and send 

us into another negative feedback loop of falling house prices, hundreds of thousands of mortgages sinking underwater, and more 

house foreclosures hitting the banks’ balance sheets in the resale 

market. This would, in turn, result in more pressure on home 

prices, which would then feed back into the loop and cause the 

economy to further contract. 

The end result: more stress throughout the economy, and likely 

a double-dip recession the government has fought so consistently 

and hard to avoid. The Mortgage Interest Deduction did not contribute to the housing bubble. It has been part of the tax code for 

nearly 100 years and has helped to ensure a strong homeownership 

rate among American families. These incentives remain important 

factors in making the lifetime decision of buying a home. 

The Mortgage Interest Deduction allows families to become 

homeowners, to build wealth, to support their communities. It is 

vital to restoring stability to the American housing market and the 

overall economy, since it facilitates homeownership by reducing the 

carrying costs of owning a home. To millions of hardworking 

middle-class families, these savings can make the difference between achieving and not achieving their dream of homeownership. 

The obvious flip side of this coin is that reducing or eliminating the 

Mortgage Interest Deduction equates to a tax increase on homeowners at a time when they can least afford it. 

Homeowners already pay 80-plus percent of U.S. Federal income 

taxes, but, if the Mortgage Interest Deduction is eliminated, that 

number could quickly rise to 95 percent. The Mortgage Interest Deduction is a tax break aimed squarely on the middle class, as almost two-thirds of those who claim it are middle-class earners. We 

should continue to encourage homeownership with our tax policies, 

not penalize it. 

The home building industry has led this country out of every recession but for one. We may say that this time it will be different, 

but it never is. We need to put construction workers back to work 

and get the economy back on track. The way to do this is to reduce 

uncertainty, build confidence, and support housing. I would strongly encourage this committee to reaffirm its commitment to homeownership, and to leave the important tax provision in place. 

We should not change the rules of the game for those who have 

already made the decision to purchase a home in reliance on the 

Mortgage Interest Deduction, and we should tell those potential 

home buyers sitting on the fence that it is safe to buy a home; the 

rules are not going to change. 

14 

We face a chicken-or-the-egg dilemma: can housing get better 

without recovery of the economy, or can the economy get better 

without first seeing a rebound in housing? Either way, there is 

growing acceptance that the U.S. housing industry must get 

healthier as part of a robust and self-sustaining economic recovery. 

In order to put Americans back to work, the administration and 

Congress have been considering various ways of putting more 

money into the hands of consumers, including helping homeowners 

to refinance at historic low interest rates. Eliminating or significantly reducing the Mortgage Interest Deduction would do the complete opposite and take away discretionary spending from homeowners. Government decision-makers should ask themselves, do 

they wish to increase or decrease the cost of homeownership at this 

precarious time? 

The administration’s refinancing initiative is aimed directly at 

decreasing that cost, particularly the cost of monthly mortgage payments, largely for the purpose of stimulating consumer expenditures on other purchases. The Mortgage Interest Deduction proposals under consideration, on the other hand, would increase the 

effective cost of homeownership, forcing homeowners to reduce 

their consumption of other things. This anti-stimulative behavior is 

exactly the sort of conduct government should discourage at this 

point in time. 

While I appreciate the daunting task this committee has before 

it to reform the Nation’s tax code, I would urge you to remember 

just how bleak the housing market is for American families before 

considering reductions in the Mortgage Interest Deduction. A further erosion of home values now, 6 years into the worst housing recession in more than 7 decades, could have a devastating effect on 

the broader economy. 

I know that you intend to fully consider the consequences of all 

current tax expenditures during your tax deliberations, and I am 

confident that, when you do so for the Mortgage Interest Deduction, you will recognize just how valuable the provision is to American families, the American way of life, and will keep it in place 

as our economy begins to recover. 

Thank you for the opportunity to testify. 

The CHAIRMAN. Thank you, Mr. Nelson. Time goes by pretty 

quickly here. 

[The prepared statement of Mr. Nelson appears in the appendix.] 

The CHAIRMAN. Dr. Green, what about the argument that, gee, 

at this time housing is in such a sad plight that it does not make 

sense to reduce or phase out the interest deduction? 

Dr. GREEN. That is why I wrote in my testimony, I would not do 

it at this moment. I mean, in a perfect world I would, but that is 

manifestly not the world we live in. It is why I proposed a rule that 

says, have a metric for when housing has recovered. It may be 

sometime before that occurs. 

The CHAIRMAN. What about, if this Congress does tax reform this 

year or next, converting the deduction, as has been suggested, to 

a credit? 

Dr. GREEN. Well again, if the deduction is converted to a credit 

for most people, particularly outside the coasts, it could wind up 

being a larger subsidy, particularly if it is a credit you are allowed 

15 

to take even if you are not an itemizer. So it depends on how the 

credit is constructed. 

The CHAIRMAN. All right. 

Mr. Nelson, do you think that this country should undertake tax 

reform, corporate and, say, individual? And, if we do, do you suggest we cut back on some of the other types of expenditures, but 

not the Mortgage Interest Deduction? 

Mr. NELSON. Well, we clearly need tax reform. But I would not 

touch the tax benefits associated with homeownership. We have 

millions of people who have bought homes based on the rules as 

they know them. They are simple, they are easy to understand, and 

that is what they bought into. They made their decision to buy 

their house based on those economics, and I think at this point in 

time, or any time in the near future, to change the rules of the 

game and pick winners and pick losers is a big mistake. 

The CHAIRMAN. But what if we were to, just across the board, 

start to pare back, but say provided something that would not go 

into effect until a later date, so people have notice, they have the 

ability to plan? 

Mr. NELSON. But people have made decisions. They are committed to a 30-year mortgage, a 20-year mortgage, and we are tinkering with their cost of occupancy of the homes. 

The CHAIRMAN. Have you looked at grandfather provisions? 

Mr. NELSON. I think that would have to be considered. To be fair, 

there would have to be grandfathering. But again, that gets complicated, as usual, right? 

The CHAIRMAN. Right. 

Mr. NELSON. Homeowners bought before this. 

The CHAIRMAN. What I am trying to get at, obviously, is the degree to which we should reform the code, and the degree to which 

anybody should be exempt from that reform effort. 

Mr. NELSON. I just believe that we ought to leave housing alone. 

I understand tax reform is very important here, but we have an 

enormous housing crisis in this country, and we should do nothing 

to affect that, and we should work on housing first. 

The CHAIRMAN. Yes. I have a ton of questions, but I have to run 

if I want to vote. The hearing will stand in recess until another 

member returns. But thank you very much. If you would hold on 

for just a few minutes. 

[Whereupon, at 10:46 a.m., the hearing was recessed, reconvening at 11:04 a.m.] 

Senator NELSON. The hearing will resume. 

I always wanted to be chairman of the Finance Committee. 

[Laughter.] 

Senator Breaux, you never got to be chairman of the Finance 

Committee. 

Senator BREAUX. I used to sit right there. 

Senator NELSON. May I ask any of you, given that economists 

generally agree that the value of the Mortgage Interest Deduction 

is imbedded in the price of housing, with our home prices down so 

much—nationally it is almost 30 percent from the peak back in 

2007—how much more would housing values fall if you eliminated 

the Mortgage Interest Deduction? Senator Breaux? 

16 

Senator BREAUX. Well, Senator Nelson, I think that what we recommended in our report has to be looked at in its totality. Number 

one, we did not recommend eliminating the mortgage deduction, we 

recommended exchanging it for a 15-percent tax credit and capped 

that to interest payments attributable to the average cost of a 

house in your area. It is important to note that what we did with 

those savings was to eliminate the Alternative Minimum Tax and 

to reduce the individual rates. The top rate, from 35 percent, went 

to 33, 33 went to 30, and 28 went down to 25. So, it was revenueneutral in the sense that you got a lot in tax savings and were able 

to use that to lower rates. What we did was to keep the tax incentives in the tax code for buying a house, but reduced them somewhat. 

I guess the thing that we heard in testimony was, if I have a 

choice between having my mortgage deduction reduced a little in 

exchange for a reduction in my individual rates, I will take the individual rate deduction any time. 

Now, we phased it in over 5 years. You know probably better 

than anyone that housing is in terrible shape, particularly in Florida. So I think the committee could adjust that and make it a 

longer phase-in if you thought it was feasible. There are things you 

could do to make it work better. 

Senator NELSON. Anybody else? Yes. 

Mr. NELSON. I think it is safe to say, no one knows. For that reason we ought to leave it alone, because it clearly is not going to go 

up, it is going to go down some indeterminable amount. Also, does 

it increase the cost of homeownership for people who are on the 

edge now? They are struggling to make mortgage payments now. 

They may be under water. Now the monthly cost effectively goes 

up, and do they reach a point where they are ready to send the 

keys in? If they send the keys in, we are back into that loop of foreclosure, short sale, what have you. I think, given where the housing industry is right now, it likely would be more than it should 

be. But clearly, I do not think anybody knows. 

Senator NELSON. Would this have the effect of more mortgages 

under water? Dr. Case? 

Dr. CASE. I think that is absolutely right. I think you are absolutely right, Senator. If you look at this, there are 10 million properties potentially under water. We do not know for sure how many, 

but the best guess is it is something around 10 million. You have 

a lot of buyers who are waiting, and sellers who have property that 

is not under water trying to sell, and they are holding out. Everybody is waiting for this thing to do what it has done in the past, 

which is to clear. But the process that cleared the markets in the 

past is not working today. 

We are not having household formations. People are doubling up, 

tripling up. They are going home because we are not treating them 

well when they get here, and there are no jobs. So the household 

formations are down, vacancy rates are still up. It kind of makes 

you nervous. I produce these house price indexes that come out 

once a month, and I am nervous as the devil when they come out 

because, if it starts to go downhill, there are a lot of people sitting 

and waiting who are going to decide not to go into the market and 

stabilize it. So I think it potentially could be a tipping phenomVerDate Nov 24 2008 15:06 Dec 31, 2012 Jkt 000000 PO 00000 Frm 00020 Fmt 6633 Sfmt 6633 R:\DOCS\77019.000 TIMD
17 

enon. It could be quite bad, where you have just tracts of housing 

for sale and no one dealing with it. But to just reinforce what my 

colleague was saying, it could stabilize, it could go back up, but it 

does not seem to be going in that direction given all the things that 

are happening. So it is potentially just damaging, and it could push 

it over the edge. 

Dr. DIETZ. And just a 5-percent additional price decline, which 

might be at the low end of estimates of what would happen if you 

totally eliminated the deduction—those could be as high as 15 percent—a 5-percent price decline would increase the number of underwater mortgages by 2 million. We are at about 11, 12 million. 

That is, 25 percent of homeowners with a mortgage are under 

water right now. To add 2 million on top of that, particularly in 

certain geographic areas, would be devastating. 

Senator NELSON. What about the cap of a million dollars of mortgage for deducting interest? 

Dr. DIETZ. Well, a common proposal for that is to limit it to 

$500,000. We think, at NAHB, that that too would also have strong 

negative effects in certain high-cost areas. For example, something 

like 10 percent of the housing stock in the country is priced 

$500,000 or above. It sounds like a small number, 10 percent, but 

it is highly geographically concentrated. 

Something like one-third of those homes are located in just four 

States: New York, New Jersey, California, and Virginia. So lowering the cap would make it more expensive to buy what could be 

an ordinary single-family home in a high-cost area that could cost 

$600,000. The question is, who bears the burden if you do that? 

Well, it is going to be the younger home buyer who does not have 

the wealth to pay cash, or the investor buyers, who are increasingly a large share of the market right now—it is those younger 

home buyers. As Dr. Case said, that means fewer household formations, which is what the economy needs right now to absorb excess 

inventory: marriages, children, the creation of the middle class in 

the long run. 

Senator NELSON. Senator Hatch? 

Senator HATCH. Well, thank you, Senator Nelson. I have been 

waiting a long time to get Senator Breaux in front of the committee, I will tell you. We welcome you. We appreciate you. And we 

certainly enjoyed serving with you in the U.S. Senate. We are 

happy you are doing so well on the outside. 

Dr. Dietz, in your testimony you note that President Obama’s 

proposed 28-percent cap on deductions could reduce housing prices 

by another 10 percent in larger metropolitan areas. Now, you also 

note that it would disadvantage many construction and manufacturing businesses which are organized as pass-through entities. At 

least, that is my interpretation. 

It seems to me to be the last thing that we should be doing right 

now. Can you elaborate on the negative impacts this proposal could 

have on the economy, in the housing sector in particular, particularly as it relates to economic growth in jobs? Mr. Nelson, I would 

like to hear your thoughts as well on this. 

Dr. DIETZ. The 28-percent cap would have strong negative effects 

on housing. The cap would apply to itemized deductions, including 

the Mortgage Interest Deduction, the Real Estate Tax Deduction, 

18 

so it would hurt housing demand in high-cost areas. We just talked 

about the $500,000 cap. It would have similar effects to that. It 

would also add complexity to the code, which is kind of ironic, as 

we are trying to look for provisions that would reduce complexity. 

As you mentioned, it would actually have an affect on the business side, too. It affects the section 199 deduction. Eighty percent 

of NAHB’s members are pass-through entities. They are small 

builders organized as partnerships and S corporations. That 28- 

percent cap would take a hit at their tax deduction for the Production Activities Deduction, which would hurt jobs. It is important to 

keep in mind, in terms of home building’s long-run economic impact, every single family home constructed creates three full-time 

jobs. 

Senator HATCH. Mr. Nelson, you have been in this business a 

long time. Pulte is one of our great home building companies. 

Could you answer that question in your viewpoint? 

Mr. NELSON. I have been in this business a long time, actually 

30 years, and have sat through a number of recessions and 

downturns, and this one is unlike, of course, anything I have seen 

in my career. I think moving down to 28 percent at the margin has 

the potential, of course, to cause a recalibration of prices not only 

for people who have bought houses and made the decision based on 

a higher tax benefit—so their effective cost of ownership is going 

to go up, which reduces discretionary spending on their part—but 

on our part for new construction, with homeowners doing the calibration, calculating their cost of ownership, and looking at their tax 

benefit at 28 percent versus perhaps 35 percent, or maybe 39 percent when the Bush tax cuts are changed. So I think it has an impact, again, of driving values down, Senator. That is the last thing 

we need right now. We need things to support and stabilize values, 

and should do nothing to drive values down. 

Senator HATCH. Dr. Green, this one is for you. You advocate 

phasing out the Mortgage Interest Deduction. Because of concerns 

over the shock to the fragile housing market a phase-out would 

have, you suggest not even beginning the phase-out until government housing statistics demonstrate a sustained recovery in housing prices. Now, to what extent would your proposal, if enacted, in 

and of itself depress house prices? 

Dr. GREEN. So, because of expectations about the Mortgage Interest Deduction, I did an estimate with Pat Hendershott about 15 

years ago, looking at what would happen if the Mortgage Interest 

Deduction were just eliminated overnight. We came up with an estimate, if I remember, in the neighborhood of 9, 10 percent. But 

things were very different in 1996 than they are right now. 

One big thing that is true about housing markets around the 

country right now is there are a number of places where prices are 

less than replacement cost, which means that, if you are living in 

a place where you think there is going to be any population growth, 

any household formations at all, in the long run prices should recover at least to replacement cost. So the long-term impact of this 

on those places, I think, is pretty remote. 

As a consequence, so long as the phase-out was long-term, orderly, and people could deal with it, I think it would have a fairly 

minimal impact. That said, there are a few places in the country, 

19 

such as where I live, the coasts, California, New York, Boston, 

Washington, where the impact in the long run would certainly be 

substantial. It could be in the neighborhood of 15, 20 percent in 

some of these markets, because these are places where we do see 

a lot of capitalization of taxes into values. 

From a long-term perspective, however, what this will do is make 

these areas more affordable. For those who do not get the benefit 

of the Mortgage Interest Deduction, it might allow them to buy a 

house that they would not otherwise be able to buy. So I am not 

sure that, as a policy standpoint, that would be a bad outcome, but 

I understand transition at the moment is really problematic because we are in such a weak housing market and such a weak 

economy. 

Senator HATCH. All right. Thank you. 

Dr. Case, you note that housing starts are still at ‘‘Depressionera numbers’’ and that a further decline in home prices now would 

be devastating. Now, as a result, you state that a proposed phaseout of the Mortgage Interest Deduction would get your support ‘‘if 

the housing market gains stability.’’ I have to say I share your concern that we should be very careful not to do anything that would 

actually make the current situation worse. I think almost all of you 

agree with that. With unemployment stuck at over 9 percent, and 

Depression-level numbers in housing, people of this country really 

are hurting. 

So I want to ask you to elaborate a bit. When you say that the 

housing market ‘‘must first gain stability,’’ can you tell me what 

housing stability would look like and what you think we might see, 

or when you think we might see that type of stability occur? 

Dr. CASE. Well, if you think about what house prices are telling 

you, about 5 million properties change hands in a given year—at 

annual rates. Right now we are running about 5.03, I think the latest figure was, 5.03 million. That sounds like a lot, but it is less 

than 5 percent of the stock. What we do with the number when we 

get house prices—we get transactions as houses sell. We look up 

when those properties changed hands last, and we put it into an 

index. We look at those indexes, and we observe what takes place 

and then impute that value to the whole stock of housing in the 

country, and we say wealth went up by $1 trillion or down by $1 

trillion. It is really what those 5 percent of buyers are doing. It 

does not take a lot to move them, and they are, by and large, optimists. 

So these are people who actually bought houses who end up in 

these price indexes. So my point is that it is fragile right now because, if you tip the scale against it, and it starts to decline, there 

is a lot of evidence there is inertia. So, what I would say ‘‘stabilized’’ means is that prices at least are flat for a couple of years, 

they are not falling. 

You go back to 2006 and look what happened to prices. We never 

had a year—we never had a single quarter actually—in these price 

indexes over a 30-, 40-year period where house prices fell nationally at all. That is what got us into trouble. When they fell, they 

went down 33 percent nationally. That is a huge hit at $7 trillion, 

if you do the arithmetic I was talking about. So it puts you in a 

20 

* For more information, see also, ‘‘Present Law, Data, and Analysis Relating to Tax Incentives 

for Homeownership,’’ Joint Committee on Taxation staff report, September 30, 2011 (JCX–50– 

11), http://www.jct.gov/publications.html?func=startdown&id=4366. 

kind of precarious position, unless you really see that rapid decline 

stopping. 

The Housing Tax Credit did stop it for a period of about 8 months. The index went up to $6.5 million from $5 million as a result of that credit, and then, when the credit went away, it went 

right back down to where it was before. So I would say right now 

you are starting to see some stability. When those diagrams stop 

going down, they go flat, and existing sales and prices are the key. 

You watch those, and, when they start to get stable, I think there 

is a chance we have a good recovery. 

But the economy has to keep going. If the economy goes into a 

double dip, other things happen. It is not just the responsibility of 

this deduction, it is everything else that is going on that is driving 

emotions. There is inertia, and it is a precarious position that the 

market is in. I think that is what we are worried about. I think 

it is kind of like other things, you know it when you see it. Stability starts to show up, and things will pick up if it is there. 

Senator HATCH. Thank you. 

Senator Grassley? 

Senator GRASSLEY. Thank you. I only have a question or two in 

one area, so it will not take very long. The Joint Committee on 

Taxation prepared a document for today’s hearing including data 

on homeownership and the interest deduction of OECD countries.* 

According to this document, in addition to the United States, 18 

OECD countries allow a deduction for mortgage interest expense. 

Fifteen of these countries have higher rates of homeownership, 

while 3 have lower rates. Conversely, 11 OECD countries do not 

provide a deduction for mortgage interest. Of these, Canada’s and 

Australia’s homeownership rates are about the same as the United 

States’, while the rates in Germany and Japan are significantly 

lower. 

One aspect of this I want to ask Senator Breaux, and another aspect I want to ask Dr. Case and Dr. Green. In the case of Senator 

Breaux—and I will state both of these questions, and you can take 

turns answering them. 

Could you tell us, Senator Breaux, whether the tax reform panel 

you chaired with Senator Mack considered whether or not and how 

other countries incentivized homeownership, and whether that 

ought to have any impact on our policies here in this country? 

And for Dr. Case and Dr. Green, I would appreciate your 

thoughts on why the data on homeownership rates vary so significantly among OECD members regardless of whether they provide 

a tax deduction for mortgage interest. 

Senator BREAUX. Well, Senator Grassley and Senator Hatch, 

thank you for letting me speak here today. Before you came in, I 

suggested that this committee, more than any other committee in 

Congress, has the ability to put together a tax reform package. You 

all have had a history of working across party lines, and have 

major accomplishments to show for it. 

No other committee, I think, in this Congress has the capacity 

to do what you all are being challenged to do. I would also suggest 

21 

that no one who has tax benefits in the tax code is going to come 

up to this witness table and ask you to change them. They are 

going to give you their best argument as to why things ought to 

stay just as they are, and I understand that. I have heard that as 

long as all of you have. 

What we have recommended in our commission was not to eliminate the deductibility of mortgages completely. We spend $140 billion a year through the code on incentives for homeownership in 

this country. If you got rid of all of them, you could reduce the tax 

rates in this country by 12 to 13 percent right across the board. We 

did not recommend that. We recommended phasing in a new program over 5 years. You could do it over a longer period of time. We 

gave a tax credit of 15 percent to everybody on their home on interest that they pay. About 70 percent of the people in the country 

do not get the benefits because they do not itemize. 

Our proposal would give it to everybody, whether they itemize or 

not. Fifteen percent of the interest rate is deductible and capped. 

You could cap it at a half-million dollar home. That would affect 

a smaller percentage of homeowners because most of them are 

under half a million dollars. But you cannot look at that in isolation. 

What we did with those revenues, and the others we raised, was 

to reduce the corporate rate from 35 to 30, the top rate from 35 

to 33, the 33-percent rate went down to 30, and the 28-percent 

went down to 25. Then we eliminated completely the AMT. So a 

lot of people would say, if I have that deal, and I could have my 

rates reduced, and I do not have to worry about AMT, and I can 

still get a credit for buying a house, I think that is a pretty good 

deal. That was the plan that we had submitted. 

Senator GRASSLEY. In that process you went through then, you 

did not anticipate what was working or not working in other countries? 

Senator BREAUX. Yes, we certainly did. I mean, Australia, the 

United Kingdom, and Canada have no deductibility on interest 

rates for homeownership. Some of them had higher rates of ownership than we do, some of them have about the same. I would make 

the argument that there would not be that much change if you can 

also reduce the individual tax rates. That is a huge incentive. That 

is money in people’s pockets to be able to buy a house and still get 

some credit on that purchase. And every home owner would get it 

as opposed to just a few. 

Senator GRASSLEY. Dr. Case and Dr. Green, do you need to have 

me repeat what I asked you? 

Dr. CASE. No. 

Senator GRASSLEY. Go ahead, then. 

Dr. CASE. I mean, I think when you look across countries, there 

are a whole lot of things at play, like the posture of monetary policy. It explains not just differences in the homeownership rate, it 

explains the difference in prices, and differences in the dynamics. 

I went down to a conference that was in Australia called by Ian 

Macfarlane, who is head of the Central Bank, the Reserve Bank of 

Australia, in 2003. 

The question on the table was, can monetary policy be used to 

pierce an asset bubble? We had prices rising rapidly in this counVerDate Nov 24 2008 15:06 Dec 31, 2012 Jkt 000000 PO 00000 Frm 00025 Fmt 6633 Sfmt 6633 R:\DOCS\77019.000 TIMD
22 

try. Australia was in fear of having that happen down there. He 

made the decision to go after it a little bit. They tried to slow it 

down, and it basically worked. That ends up putting Australia in 

a different position than we were in, and it had nothing to do with 

the homeowner deduction. 

It is just, when you sort it out, there are economies that have 

been very pro-homeownership as a whole. We have Fannie and 

Freddie. We have no capital gains on the sale of homes. We had 

a system that was set up, not just with the deductibility of credit 

in the non-taxation, we had a system set up where we were really 

fanning the fires on the way up, and there was nothing, no reason 

for people to resist because housing prices had gone up for 35 years 

nationally without anything stopping. 

So, if you look at Texas, there was a problem, in New England 

there was a problem, but they were regional, they went away. Optimism was the rule, and we threw everything at housing. I think 

that is the reason some of us up here would like to see some of that 

reduced, but we have just been through a horrible collapse of the 

economy, and it is really housing at the center of it. That is what 

scares us all. 

Senator GRASSLEY. Dr. Green? 

Dr. GREEN. Yes. I think we tend to think of tenure as being 

taken one of two forms, you either are an owner or renter, and it 

is a little more complicated than that. So institutions vary a lot by 

country, so Germany, for example, has a low ownership rate, in my 

view, for the same reason that New York City has a low ownership 

rate, which is tenant rights are very strong in Germany. 

So to some extent, if you are a German and you are a renter, you 

get a lot of the benefits of home owning without the headaches of 

it. Somebody else has to take care of your house, but you get to live 

there pretty much as long as you like. Eviction is very difficult, and 

there is a limit to how much landlords are allowed to raise the 

rent. They can raise it, but it is tied to a price index. 

On the other end of the spectrum, Spain has, I believe, the highest homeownership rate in Europe, at 80 percent. The reason for 

that is, anyway my understanding is, their rental market is so dysfunctional that nobody, no sensible investor, would be willing to invest in rental housing. So people become owners because there 

really is no alternative. So to try to pin differences in homeownership rates on differences in tax codes is really problematic. I think 

these other institutional features are more important. 

Senator GRASSLEY. Thank you very much. Thank you. 

Senator HATCH. Thank you. 

Senator Wyden? 

Senator WYDEN. Thank you, Mr. Chairman. My apologies to our 

panelists. This is excellent panel. 

I wonder if one of you would be interested in taking on the question of, how much has current housing policy contributed to the 

economic hard times that we are seeing today? Because it strikes 

me that you have to get at that question in order to go on to the 

debate about various kinds of alternatives. Let me ask you that, 

Dr. Green. 

Dr. GREEN. I do not want to take up everybody else’s time, and 

I see I have 4 minutes and 20 seconds here. That is quite a quesVerDate Nov 24 2008 15:06 Dec 31, 2012 Jkt 000000 PO 00000 Frm 00026 Fmt 6633 Sfmt 6633 R:\DOCS\77019.000 TIMD
23 

tion. Let me tell you what. I think our obsession with homeownership led us to forget what being a homeowner really means. There 

was a view that, if you had your name on a title, even with a 100- 

percent mortgage, you were an owner, when in fact, if you have no 

money in your house, you are not really an owner—you own a call 

option to buy a house some day. So, if the value goes down, you 

have every reason to leave, and, if it goes up, you have every reason to stay. 

This moves outside of tax policy; this gets to underwriting policy 

and to, I think, a misguided effort to call people homeowners who 

really were not. So, from a long-term housing policy perspective, I 

think making sure people have some sort of, to use a cliche ́, skin 

in the game when they buy a house, is really important. It is controversial how much that has to be. I really do not know the number, but we have a long history with programs where people did 

not put their own money into houses, and things turned out badly. 

The HUD section 235 program of the 1970s was like that. 

Senator WYDEN. Let me just move on—particularly since we 

have you here, Senator Breaux—to the importance of tax reform, 

and the urgency of it all, because, as you know, a big part of the 

discussion now is, is there time, how would you do it, and all of 

the issues that are inevitably part of a Washington, DC debate. 

The one consideration to me, in terms of the urgency, is that I 

believe tax reform is the one unused tool in the economic toolshed. 

If you look at where we are today, we have seen stimulus bills, we 

have seen automobile bills. We have seen all kinds of legislation, 

and here you have tax reform almost sitting there in the tool shed, 

rested and ready, and there is some proven experience here of 

great benefit. 

I went to the Bureau of Labor Statistics’ numbers, and we found 

that, in the 2 years after the 1986 Tax Reform bill, the country created 6.3 million new jobs. Now, nobody can conclude that every one 

of those jobs was due to tax reform. Nobody ought to go out and 

about and try to make that argument. But clearly, it was beneficial. 

What is your sense about how urgent this is? Because, as you 

know, the super committee is trying to find a way to go forward, 

and obviously this committee is working on it. So I would like to 

hear your sense about the urgency of all of this. 

Senator BREAUX. Well, I think it was urgent when we recommended it in 2005, and I think it was urgent when they did it 

in 1986. I think probably it is more urgent today because of the 

economic conditions we face in this country, and we can reform the 

code in order to promote growth and stability economically. I hope 

that the super committee could recommend tax reform. I do not 

think they are going to be able to do it. They do not have enough 

time to do it. 

Tax reform has to come from this committee, and it has to come 

from the Ways and Means Committee, where the talent and expertise on reforming the code lies, from a professional standpoint. I 

think they could make some recommendations that would instruct 

the committees to come back with a tax reform recommendation 

which meets certain targets, in 6 months or 8 months. But I think 

24 

waiting for the super committee to do tax reform might not be possible. 

So, can you do it in an election year, a presidential election year? 

I tend to doubt it, as optimistic as I try to be. I think it is going 

to be very difficult to do major tax reform this year out of the super 

committee, and it will be very difficult to do it in a presidential 

election year, which means then we are looking at 2013. 

But, if any committee can do it, it has to be this committee. I 

mean, if you look at the things I said earlier, we did NAFTA, we 

did SCHIP, we did prescription drugs, we did welfare reform. Either side could have stopped the other side, but they did not, and 

you produced legislative proposals that are still there today and 

serving us very well. It is urgent, and it is time to start, and this 

committee is the place to start it. 

Senator WYDEN. Senator Hatch, could I ask one more question? 

Senator HATCH. Sure. 

Senator WYDEN. Thank you. 

I want to ask one other question, again about the prospect of 

bringing both sides together. As you know, Senator Breaux, one of 

the most contentious issues in Washington, DC has been this question of revenue. When the word ‘‘revenue’’ is offered up, there are 

folks, conservative folks, who will say, ah, the Democrats are just 

out to raise taxes. That is sort of the refrain. When Democrats hear 

that comment, that all they are doing is trying to raise taxes, well, 

all the conservatives want to do is protect the wealthy. 

What to me is appealing is that tax reform is an opportunity for 

both sides to agree on revenue, that there is a chance, as I mentioned with those numbers from the 1986 Tax Reform bill, to create 

jobs in the private sector, to generate revenue in the private sector, 

have folks who are unemployed, for example, going back into the 

private economy. This is a chance to bring both sides together. 

I asked this question of Maya MacGuineas, who is the president 

of the Committee for a Responsible Federal Budget, and she said 

‘‘yes.’’ She said tax reform is the one approach to revenue that both 

sides can agree with and that also helps to make the case for using 

tax reform to break this gridlock on how we move the economy forward. Would you agree with Ms. MacGuineas? What are your 

thoughts on that? 

Senator BREAUX. I agree with both. I have a great deal of respect 

for the work their group does; it is outstanding work. I agree with 

your premise. I think that what we tried to do was to eliminate 

and reduce some of the incentives, if you would call them that, and 

special carve-outs and benefits in the code, but we used those revenues to reduce the rates across the board and eliminate the AMT. 

You cannot look at it in a vacuum. You cannot say, oh, the 

Democrats are raising taxes by eliminating some of these preferences, when you are at the same time advocating using those revenues to reduce the tax rates in other areas. If you can reduce the 

tax rates across the board and eliminate the AMT, you give the 

people that choice instead of looking at it in a vacuum of, oh, you 

are going to do away with my home mortgage? Well, number one, 

we did not, we still keep it and transform it, but we use that to 

reduce everybody’s Federal tax liability. Then they say, oh, really? 

But then that is a good trade-off. That is a legitimate trade-off. 

25 

Senator WYDEN. Mr. Chairman, I have one last question, but I 

will wait until you take your next round. 

Senator HATCH. Go ahead, Senator. 

Senator WYDEN. One last question. I would ask this of the entire 

panel. When you look back at the experience of 1986, one of the 

considerations that hits you first is that, basically as soon as the 

ink was dry on the reform bill in 1986, everybody went back to 

business as usual. You would essentially come back to this committee—Senator Breaux is smiling because he remembers this, because everybody—— 

Senator BREAUX. I did some of them. 

Senator WYDEN. You did some of them. Everybody came back 

and started offering various deductions and credits and the like, 

and essentially the good work to kind of drain the swamp that was 

done in 1986 began, in effect, to unravel. I have been looking hard 

at the question of how, as part of tax reform, this time you take 

steps to fight that kind of backsliding. 

Now, the first consideration is, no current Congress can ever permanently bind the action of future Congresses, but surely you can 

make it hard to unravel tax reform this time. In other words, you 

can force votes, you can force, for example, preferences to be examined in groups, to have them costed out as tax expenditures. 

I would be interested in your thoughts. Maybe we will start with 

you, Senator Breaux, because you went this route. Any thoughts on 

how, as part of this tax reform effort, the Finance Committee members, members of Congress, could take some steps to make sure 

that, after this current battle to bring both sides together—picking 

up on the principles of 1986 where you get rid of preferences, hold 

down marginal rates, keep progressivity—that you do not see, come 

the next year, and the next year basically, everything begin to 

unravel? Any thoughts on that? I would be interested in your 

thoughts, Senator Breaux, and others’. 

Senator BREAUX. Thank you, Senator. When we did our report in 

2005, we found out that, between 1986 when the tax code was 

cleaned up and when we did our report, there were over 15,000 

amendments to the tax code that put everything they took out back 

in. It is probably well over 20,000 amendments since then. That is 

just a fact of life. If you clean up the code and do away with all 

the preferences, there will be people at this table, myself probably 

included, trying to get them back in. That is why this committee 

has to monitor that. 

But, if what you do in cleaning it up works, then there will be 

a lot less incentive for somebody coming in to say, oh, we need 

some special incentives. That is just the way a democracy works. 

I mean, you clean it up in 2011, and in 2012 there will be people 

advocating going right back to where we were, and the committee 

has to be strong enough to say, no, we do not need to do that again. 

But they are going to come back. That is the nature of government. 

Senator WYDEN. Other witnesses on that point? 

Dr. CASE. I would just make a small point. There is a subtle difference between what was done in 1986 and what is being proposed 

here. That is, they came to an agreement, before they started, that 

it would be revenue-neutral, right? And the distributionally neutral 

rule that they set down, I think, led to the passage of that bill. 

26 

So maybe you give up on revenue as your target in a decision. 

If you set net revenues equal to zero, it is revenue-neutral, what 

we are going to do. You can get a lot of the benefits without having 

the fact that it either raises or lowers revenue on the table. 

Senator WYDEN. The only question there is, how do you deal with 

this compulsion? As Senator Breaux says, it is almost in the 

human DNA to just want to come back. I think we can deal with 

some of the considerations you are talking about. If you look, for 

example, at a number of legislative efforts, you see an element of 

what is essentially called static scoring, where you take away preferences, use those very same dollars to hold down rates, and that 

is of course attractive to conservatives, but you generate revenue 

because, as you broaden the base, you are taking steps to encourage growth. 

A number of groups, Heritage and others, have scored the proposals as generating revenue. I think we can get at the question 

you are talking about. I am more concerned about the point Senator Breaux has raised, that it is almost like you would have to 

change the gene pool or something to keep people from coming 

back, but at least we ought to make it harder. 

Maya MacGuineas, again, made some very constructive recommendations on this point. She talks about, once you have an ongoing disclosure of tax expenditures—and then our idea has been 

to perhaps look at forcing some votes so that, if you were to unravel something, people could understand the pluses and minuses. 

But I gather our friends the home builders have some ideas on 

that, and we would like to hear them. 

Dr. DIETZ. When tracking tax expenditures, more information is 

definitely better. Some tax expenditures are narrowly claimed by 

only a few thousand, a few hundred thousand taxpayers. The Mortgage Interest Deduction is clearly something that is claimed by 35 

million people. It is not a loophole per se; it has been around a long 

time. It is not one of those items that was added in these rounds. 

But more information is definitely better. For example, Joint Tax 

does a great job in providing the income distribution of the tax benefits of some of the larger itemized deductions and some of the 

other tax expenditures. Not to add work to their plate, but it would 

be very useful to provide demographic distribution. It is something 

we argue in our written testimony. Who claims these by age cohort? 

I think that is important because, for example, in the 2005 panel, 

you did have a weakening of the Mortgage Interest Deduction down 

to a 15-percent tax credit. A revenue-neutral tax credit would probably be something like 20 percent. So you weaken the housing item 

to pay for things like AMT repeal. So who pays AMT? If you look 

at it by age, it is typically older taxpayers. So there you had 

maybe, on a revenue-neutral basis, neutrality, but you definitely 

had winners and losers among age cohorts. Obviously from housing, that is very particularly important because those new household formations are what determine housing demand, housing construction. Anything that squeezes the people who have to buy 

homes with debt, that is going to reduce housing demand and hurt 

housing prices. 

27 

Senator WYDEN. That is an attractive idea. Certainly, with respect to disclosing the nature of who is making up those purchases 

and looking at the age distribution, that makes a lot of sense to 

me, and we will want to follow up on that. 

Dr. DIETZ. I would say, in any comprehensive tax reform, income 

distribution tables need to be accompanied by generational distribution tables as well, particularly if we are talking about entitlements. 

Senator WYDEN. I want to let the other witnesses respond, if 

they are inclined. But, Mr. Chairman, you have given me an awful 

lot of time, and that is because you are invariably such a gracious 

soul, and I do not want to impose. 

Senator HATCH. Well, thank you, Senator Wyden. I think this 

has been a particularly good panel, and we appreciate your efforts, 

and appreciate you being here. Senator Breaux, it is always good 

to see you. We appreciated you when you were in the Senate, and 

I appreciate you since you left the Senate. We just want to thank 

all of you for being here. With that, I think we do not have anybody 

else. We will recess until further notice. 

[Whereupon, at 11:44 a.m., the hearing was concluded.] 

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