Smart Growth Implications of the CBO Deficit Reduction Report

The Congressional Budget Office (CBO), the nonpartisan federal agency that provides economic data to Congress, recently released a new report, “Options for Reducing the Deficit: 2014 to 2023”. The report presents over 100 options for reducing the federal deficit through spending changes and increasing revenue, some of which impact smart growth programs.

A few recommendations made by the CBO are relevant to recommendations that Smart Growth America made in its report, Federal Involvement Real Estate: A Call for Action, which evaluates options for saving the federal government billions of dollars per year by updating certain federal real estate programs to achieve better outcomes for households, communities and taxpayers.

CBO Revenue Option 5: Convert the Mortgage Interest Deduction to a 15% Tax Credit

The CBO report recommends gradually converting the mortgage interest tax deduction (MID), which currently allows homeowners to reduce their taxable income by the amount of interest paid on their home loan, to a 15% nonrefundable tax credit, phased in over 6 years starting in 2014.

A nonrefundable tax credit means that people with zero pre-credit income tax liability would not receive a credit and people whose pre-credit tax liability is less than the mortgage interest credit would only receive the portion of the credit that offsets their liability that they would otherwise owe. The Joint Committee on Taxation estimates this option would raise $52 billion from 2014 – 2023

CBO points out that this option would provide a greater tax benefit to lower- and middle-income people which would provide a greater incentive for those people to become homeowners. It would also encourage people to purchase less expensive homes then they normally would under the current system, allowing them to save more for productive investment.

Smart Growth America’s Recommendation: Better target real estate tax expenditures

Smart Growth America recommends limiting the MID to primary residences and capping the deduction at $500,000 instead of $1 million in mortgage value. Currently the system allows people to use the MID on primary and secondary homes. SGA also recommends limiting the real estate tax deduction for households earning over $100,000 per year. We estimate that this, plus other real estate tax savings, would save $378 billion over 10 years.

By better targeting the mortgage interest deduction we will ensure that this subsidy returns to its original intent of promoting homeownership and helping more Americans reach the middle class. Phasing in these changes gradually will give the market time to adjust without major disruptions.

CBO Revenue Option 28: Repeal the Low-Income Housing Tax Credit (LIHTC)

Real estate developers who build or rehabilitate rental housing properties for low-income individuals and households are eligible to receive the LIHTC, which is designed to encourage investment in affordable housing. The CBO report suggests that there are other programs that can be used for this same goal and that the LIHTC should be eliminated. The Joint Committee on Taxation estimates this measure would increase federal revenue by $41 billion from 2014 – 2023.

Why we disagree: As the Congressional Budget Office points out in its report, the downfall of this recommendation is that the rehabilitation and construction supported by the LIHTC  helps turn around blighted neighborhoods, mostly in poor areas of the country that are often forgotten and under funded for rehabilitation and new construction.

Smart Growth America’s Recommendation: Preserve and increase the Low Income Housing Tax Credit

The Low Income Housing Tax Credit is the principal way the federal government supports the construction and preservation of affordable rental housing. The credit helps the private sector add about 100,000 rental units annually. However, this is not enough to meet growing demand. Smart Growth America recommends making the credit’s nine percent fixed minimum credit rate, which applies to new construction and substantial rehabilitation, permanent and enact a fixed floor rate for the acquisition credit at no less than four percent. In addition, we recommend increasing the credit’s annual allocation by 50 percent.

By ensuring the Low Income Housing Tax Credit is a permanent part of the tax code and by increasing its effectiveness and efficiency, policymakers will bring affordable housing to more communities and provide a crucial safety net for American families. The credit also supports balanced housing choices by providing financing tools to meet demand for affordable rental housing choices.