Republican plan for tax cut could hit homeowners


March 05, 1995|By Kenneth R. Harney

Washington -- Homeowners and buyers who live in high-cost, urban areas -- especially on the East and West coasts -- should be alert to a crucial flaw in the multibillion-dollar tax cut promised by the Republican "Contract with America": Sen. Bob Packwood of Oregon never signed onto it. Nor did any other Republican senator on the tax-writing Finance Committee that he now chairs.

And guess what? Mr. Packwood believes that an excellent way to partially pay for capital gains tax breaks and other Contract goodies is to impose a $250,000 maximum limit on the size of a home mortgage that qualifies for interest deductions on federal tax returns.

In a series of late-February, private meetings with industry groups on Capitol Hill, Mr. Packwood argued forcefully for the $250,000 cap, as well as for putting deficit reduction and comprehensive tax reform, such as the flat tax, ahead of "piecemeal" tax cuts. Publicly, according to his press secretary, Bobbi Munson, all that Mr. Packwood is doing is "throwing out examples: How do you pay for a 17 percent [tax] rate? You cap the mortgage interest deduction at $250,000."

But sources familiar with his tax philosophy say Mr. Packwood has believed for years that real estate and housing get far too heavy subsidization in the federal tax code. Mortgage interest write-offs alone will cost the government an estimated $54.2 billion in fiscal 1996, according to the Treasury Department, and write-offs of property taxes by homeowners will cost another $15.7 billion. Under current law, homeowners may deduct interest on first mortgage balances up to $1 million.

The last time Mr. Packwood headed the Senate Finance Committee, said one Capitol Hill staffer, "look at the chunk of flesh he took out of real estate's hide" -- specifically by devising the passive loss system of the 1986 Tax Reform Act, which sharply limits deductions on investment real estate from vacation rental homes to downtown office towers.

What would a $250,000 mortgage interest ceiling mean in practical terms? For the vast majority of homeowners, nothing painful at all since their mortgage balances fall well below that amount. They would reap the benefits of lower capital gains taxation on sales of stocks and real estate and other capital assets, but never lose a cent in current interest deductions.

But in dozens of large, urbanized markets, the cap would have a significant bite. Suburban real estate markets in the New York-Connecticut-New Jersey region would also be hard hit by the cap, as would metropolitan Washington, D.C.

A study by the National Association of Realtors and the National Association of Home Builders also projected that the tax change would put a serious dent in resale prices of homes above $360,000. In the upper brackets, houses with substantial mortgages of $500,000 or above would experience drops in resale value of up to 20 percent because of smaller deductions available to their owners.

Kenneth R. Harney is a syndicated columnist. Send letters care of the Washington Post Writers Group, 1150 15th St. N.W., Washington, D.C. 20071.

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