More Evidence the Fair Tax Will Require a Generational Sea Change

The Bureau of National Affairs (BNA) today reports:

House Republicans Could FaceTough Floor Vote on Mortgage BillWhen legislation (H.R. 3648) to exclude from income debt forgiven as a result of a mortgage foreclosure or renegotiation hits the House floor Oct. 4, Republicans could be forced to cast a difficult vote because of the tax increase used to pay for the roughly $2 billion bill.
The legislation would establish a permanent exclusion from gross income of discharged home mortgage indebtedness and pay for it by tightening the requirements taxpayers must meet to exclude gain from the sale of certain residences such as vacation homes and rental properties that eventually are converted into primary residences and then sold.
Currently, taxpayers may exclude up to $250,000--$500,000 if married filing a joint return--of gain realized on the sale or exchange of a principal residence but, under the bill, they would only be able to utilize the exclusion for the time the second home was actually their primary residence.
The legislation also would extend, for seven years, the deduction for private mortgage insurance (PMI), and would modify the qualification tests for cooperative housing corporations.
Republicans on the Ways and Means Committee have repeatedly said they support the concept of helping people during the subprime lending situation, but believe the offset is unrelated to the problem at hand and raises taxes on one group to pay for relief for another.
The issue came up at a Sept. 26 Ways and Means markup, but it did not come to a head that day because the committee approved the bill by voice vote, meaning members did not have to go on the record as supporting a tax increase (187 DTR G-5, 9/27/07 ).
"Republican members will have a difficult time because they don't feel like the pay-for is the right one, but they do feel like the policy of forgiving foreclosure debt is the right one," said Rep. Kevin Brady (R-Texas).

My, my, we're worried about people with extra vacation and rental properties possibly having to pay some capital gains (15%) tax in order to pay for tax forgiveness for people going through foreclosure? If Republicans think this is a "hard vote" then they've really lost touch with making sure tax policy serves the common man, and are more concerned about being "on record" voting for a "tax increase," no matter what the circumstances, that could be attacked by Club for Growth.

From an economic standpoint, the people who bought second homes are a significant contributing factor to those who now face foreclosure, and so is the capital gains exclusion they were expecting to exploit. When falling interest rates in the early 2000's caused house price tags to rise (just as the stock market was falling), a lot of people decided the best place to invest, for both equity and tax reasons, was in real estate. They bought second houses as investments, raising demand and prices. By 2005, 40% of home purchases were second homes!! Because of the rising prices, people who didn't own anything yet found it increasingly difficult to afford their first home, causing them to turn to exotic mortgages and liar loans to try to grab hold of the rising barge instead of falling into the sea of lifelong renting. But of course rising demand can't continue forever when there isn't much real demand for additional places to live, so now prices are falling, and people who couldn't really afford those exotic mortgages are ending up in foreclosure with negative equity. Hence the need for the tax forgiveness.

Now you can say the people in foreclosure should have been more responsible, and I agree. And yet, many of them could have afforded a home on a responsible budget if it weren't for the run-up in price caused by the demand for 2nd homes, not as a place to live, but as a way to make money and shelter it from taxes. So taking away a manipulative tax advantage from some of the people who helped cause the foreclosure crisis makes a lot of sense, the rhetoric of Congressional Republicans notwithstanding.

Under the Fair Tax, there would be no tax incentive to buy multiple properties because you have to pay sales tax on each one, and they don't provide any kind of special tax shelter. One of a gazillion reasons the Fair Tax is a good idea. But how do you expect the Congressional Republicans who are afraid to say "no exclusion of capital gains for second properties actually means no exclusion of capital gains for second properties" to vote for the Fair Tax, which will discourage second-property owners even more?

We need a Club for Citizens' Growth to systematically push out the Country Club Republicans who are more interested in protecting tax shelters for the rich than reducing the size of government and making the tax system fair. But, as I've said before, this is a marathon; a fight that will take a long time to turn over enough people in Washington.