Representative Camp releases his proposal for tax reform. What does it mean for smart growth?

Yesterday Representative Dave Camp (R-MI), Chairman of the House Ways and Means Committee, introduced his proposal for comprehensive tax reform—and it has big implications for real estate and smart growth.

Each year Americans take billions of dollars worth of income tax deductions related to real estate. Things like the mortgage interest deduction and property tax deduction can represent big savings for a household—so big that they can influence taxpayers’ decisions about the type of home they buy. Even more credits are available to real estate developers, who can get rebates to help pay for things like redevelopment projects.

These deductions are intended to help American families and communities grow stronger and more prosperous, and that’s a worthwhile expenditure. But could we achieve those goals without taking such an enormous chunk out of federal revenues? Representative Camp thinks so.

Camp’s proposal would impact a whole range of federal programs, including several provisions specific to real estate and smart growth. Perhaps most notably, the bill proposes capping the mortgage interest deduction—one of the single largest tax expenditures which costs the government an average of $70 billion each year—at half a million dollars for first and second homes. The deduction is meant to encourage homeownership, and capping it would help reduce costs for the government while still achieving that intended goal.

Camp’s proposal also preserves the Low Income Housing Tax Credit, a subsidy that helps finance the development of affordable rental housing for low-income households. Families in search of affordable homes have never had a harder time finding them, as demand for low-income housing is at an all time high and supply is at an all time low. Chairman Camp recognized the importance of retaining this critical tool, which is good, but also proposed eliminating the four percent credit and extending the credit period from 10 years to 15. Both of these changes could undercut the program’s effectiveness.

The bill also contains some worrying steps, including the proposed elimination of the Rehabilitation Tax Credit (PDF). The credit is designed to help real estate developers defray the costs of redeveloping old buildings, an important but expensive part of broader neighborhood revitalization. The Rehabilitation Tax Credit makes many redevelopment projects possible and repealing it would come with larger economic costs.

Smart Growth America outlined our own vision for federal real estate programs in the July 2013 report Federal Involvement in Real Estate: A Call for Action. If you agree that federal real estate programs like tax expenditures could be improved, send a letter to Congress supporting our proposed reforms.

Above all it’s heartening to see Congress finally tackling tax reform. Whether the proposals included here become law remains to be seen, but everyone in Washington agrees that the tax code could be more effective and more efficient, and this is the first step.