Flat tax plans have Realtors up in arms Impact on home sales, values expected to be massive, destructive

Rise in foreclosures feared

Groups mobilizing to protect mortgage interest deduction

January 28, 1996|By Lorraine Mirabella | Lorraine Mirabella,SUN STAFF

Flat tax proposals shaping the '96 election would wreak havoc on home sales and values, say Realtors opposing a simpler tax code with a single rate and fewer deductions.

The Greater Baltimore Board of Realtors is organizing grass-roots campaigns against plans such as one endorsed by zTC GOP presidential candidate Steve Forbes, which would eliminate tax write-offs for mortgage interest.

The Maryland Association of Realtors has begun meeting with the state's Republican party and business leaders to persuade them to rethink the idea.

And National Association of Realtors (NAR) President Art Godi warns of "an immediate, massive and permanent" loss of equity.

"One tax of 17 percent helps the rich but really hurts the middle class," said Frank D. Boston III, the Greater Baltimore board's director of government relations since November. "This is the most destructive thing that could happen to our industry."

Eliminating the mortgage interest deduction would cause the home foreclosure rate to double and mortgage losses to triple because of a 15 percent drop in home prices, according to a DRI/McGraw-Hill analysis for the NAR released last week.

In an earlier study for the Realtors, the economic research firm said such a plan would cost homeowners nearly $1.7 trillion, or a 15 percent loss of equity within two years.

The study showed that two-thirds of homeowners whose mortgages cover more than 80 percent of the purchase price could end up owing more than the market value of their homes, especially in Maryland and four other states.

Realtors contend that without the mortgage interest deduction, home buying would become less affordable and homes would be harder to sell, forcing owners to drop prices.

Losing the deduction could especially hurt middle-class neighborhoods in Baltimore City, which must compete for buyers with surrounding counties where property taxes are lower, Mr. Boston said.

The idea has been floated as a way to simplify a tax code in need of an overhaul and to lower taxes and interest rates.

Bill Castelli, director of government affairs for the Maryland association, argues that when the real estate market suffers, the overall economy suffers. Drops in home values also would mean drops in revenue from property taxes, he said.

"If you're losing 15 percent of the value of your home, that's where most of your wealth is, and that's a huge hit, particularly for retired people using equity in their home for retirement," he said.

The flat tax idea is one of a number of issues -- including closing costs, lead paint laws and environmental cleanup regulations -- the state and local boards expect to track closely in the coming months.

Mr. Boston, a former staff attorney with the lobbying firm Maryland Public Affairs Associates, is hoping to generate a higher level of political involvement among the trade association's 3,500 members and establish a stronger presence with elected officials.

He is surveying board members on their relationships to and support of elected officials to create a working database that can be used in lobbying efforts. Members will be asked to attend public hearings and write letters.

The Greater Baltimore group and the state association oppose efforts by legislators to repeal laws lowering closing costs.

Last year, as part of the first overhaul of Maryland's property tax system in two decades, legislators required all counties and towns to offer homebuyers and homeowners the option of paying property taxes semiannually.

Closing costs had been higher here than in many states because Maryland required a year's property taxes in advance. The changes were expected to save many homebuyers thousands of dollars at settlement time and bring costs in line with those of neighboring states. A Senate bill would repeal that law.

"We don't think the committee will view this very seriously, based on the work they put in to the closing cost legislation last year," Mr. Castelli said.

The Realtors associations support a bill that would promote the cleanup of some 700 contaminated commercial and industrial sites statewide while releasing property owners from future liability. The measure, which would include cleanup standards set by the Department of the Environment, would encourage commercial development, increase the tax base and boost jobs in the state, Realtors say.

"People will clean up and lure new business to the state," Mr. Boston said. "We're brokers, and our commercial people can sell this property."

They also support an amendment to the state's Lead Poisoning Prevention Program that would require lead-free surfaces only on interiors. Under the proposal, chipping, peeling or flaking paint on exterior surfaces would have to be restored using lead-free materials.

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