NAR should Support The Fair Tax (HR25)

Mortgage Interest Deduction

The National Association of Realtors^® aggressively supports the mortgage interest deduction (MID) because it helps people become and remain homeowners. The MID has been part of the federal tax code since it was first enacted in 1913.

A home purchase - the largest investment most families will ever make - builds family wealth, provides tax revenues for local governments and stimulates growth in all housing-related industries.

People with both low and middle incomes use the MID. According to IRS tax return data from 2002, a little more than 60 percent of the families who claim the MID have household incomes between $60,000 and $200,000.

While in any particular year only about one-third of taxpayers itemize, of the taxpayers who do itemize deductions, more than 60 percent take the MID.

Even though the MID is available to all of the almost 70% of Americans living in their own homes, only about 1/3 of them go take the time, effort and expense to avail themselves of this tax benefit.  This means that only 23% of all Taxpayers benefit from this deduction.

NAR strongly opposes any attempts to alter the current tax treatment of mortgage interest. Any changes to the mortgage interest deduction could erode the value of homes and homeownership, effectively closing the door on the American dream.

An NAR survey of home buyers found that both first-time buyers and repeat buyers ranked the desire for tax incentives as an important reason to buy.   People don't buy homes because of the MID. They buy homes to satisfy social, family and personal goals. The MID does, however, facilitate homeownership by reducing the carrying costs of ownership.

Yes, the MID can reduce the carrying cost of ownership, but the Fair Tax would let owners pay their ENTIRE payment with untaxed dollars.  

For example:  If your monthly payment is $1200, you may be able to deduct approximately $200 of that payment.  But you are still paying the difference ($1000) using after tax dollars.  

If you are in the 28% tax bracket, you would have to earn over $1,550 in wages (considering 7.5% FICA) in order to have $1000 in net after tax dollars with which to make that payment. 

With the Fair Tax, your $1200 monthly payment costs only $1200 in earnings. That's a $350 monthly savings over the existing tax system even when the MID is taken into consideration.

The mortgage interest deduction remains the most effective tax incentive to expand homeownership. Agreed, so long as there is an income tax.  But if there is longer any income tax the MID becomes a moot point.  The Fair Tax eliminates taxation of income and wealth creation.  Allowing taxpayers to take home their entire paycheck would become a even GREATER incentive to expand home ownership.

Homeownership provides important social and economic benefits. It is the cornerstone of a healthy community, the basis for positive community involvement, and a family's first step on the ladder to wealth.

The national homeownership rate has stood at a high 69 percent of U.S. households since the first quarter of 2005. Though there have been dramatic increases in homeownership among minorities, there remains a gap in ownership rates between Caucasians and African Americans, Hispanics and other minority groups. Eliminating the MID would decrease homeownership rates.

Actually, eliminating the income tax altogether would dramatically increase the number of folks that could then buy their first home, especially considering that almost 80% of all home sales are of existing properties. 

The tax deductibility of interest paid on mortgages is both a powerful incentive for homeownership and one of the simplest provisions in the tax code. It should not be targeted for change.

NAR has been both vocal and successful in protecting the MID, yet proposals to eliminate it or scale it back continue to surface in Congress. Policymakers and voters have a legitimate desire to simplify the tax system, but tampering with the deductions for mortgage interest and property tax would be unwise, if not disastrous.

Current law permits deductions of the interest paid on mortgages of up to $1 million on a primary residence and one additional residence. In addition, the interest paid on home equity loans of up to $100,000 may be deducted.

Which is better: Getting your income taxes discounted for owning a house?  Or not having to pay any income taxes at all?

NAR opposes any tax reform plan, including a flat tax plan, that does not retain the deductibility of mortgage interest. NAR also opposes any effort to convert the MID from a deduction to a tax credit.

Flat tax and other tax code simplification plans threaten the MID. In the past, flat tax proposals have come before Congress as part of the ongoing debate over how best to reform the current tax system.

NAR believes true reform can be achieved only through legislation that simplifies regulations and moves to a lower overall tax burden. Tax reform proposals that result in unfair distribution of present tax levels, heavier total tax burdens, or disruption of markets are not desirable. NAR will remain vigilant in opposing any tax reform plan that excludes the deductibility of mortgage interest.

A flat tax is a tax system in which all earned income is taxed. It has no deductions or exclusions. A single rate of tax applies to all individuals, regardless of income level. It's called a flat tax because this single rate applies to all income.

"NAR opposes any tax reform plan... that does not retain the deductibility of mortgage interest."  Okay, go ahead and keep the MID deduction, but as there would be no income taxes under The Fair Tax system the MID would be inconsequential.

Yes, a flat tax is a tax on all earned income at a fixed rate, but the FAIR TAX is tax on consumption of new goods and services and not on income or wealth creation.  With a flat tax, there are no deductions or exclusions from the income tax.  With the Fair Tax, there are no income taxes.  You pay taxes only on the new goods or services you choose to buy. 

Would you rather have a tax system that confiscates 35% from your earnings before you ever see it?  Or would rather have a tax system that charges you 23% when you choose to buy something?  That's the real choice here.

"NAR believes true reform can be achieved only through legislation that simplifies regulations and moves to a lower overall tax burden."  Sounds great, but its advocacy of the MID implies support for retaining our current complex income tax system that benefits only a fraction of American Taxpayers.  The Fair Tax would benefit ALL homeowners, allowing them to make their entire house payment using untaxed dollars.

The Fair Tax would replace our complex income taxes, capital gains taxes, withholding taxes, FICA taxes, alternative minimum taxes and estate taxes with one simple national sales tax on new goods and services.  It would eliminate $300+ Billion in regulatory compliance costs and take the tax aspect out of business and investment decisions, making for a far more productive economic environment that would create jobs, raise incomes and allow a greater number of Americans the choice of home ownership.

Updated: 3/1/07  Copyright NATIONAL ASSOCIATION OF REALTORS®
Headquarters: 430 North Michigan Avenue, Chicago, IL. 60611-4087
DC Office: 500 New Jersey Avenue, NW, Washington, DC 20001-2020
1-800-874-6500