Capitol Hill Recap: Housing and Tax Politics

Affordability is the buzzword in politics right now–and nowhere is it more of an issue than with housing.

With interest rates stubbornly high and the cost of buying a new home out of reach for many young Americans, both parties have promised to provide relief in this area. There are many factors that can lead to spiraling prices in real estate–and they’re often intertwined with tax policy.

One Democratic proposal, for instance, would deny key tax deductions to so-called institutional investors who purchase homes. The proposal, released by Democrats on the Senate Committee on Banking, Housing and Urban Affairs, would rescind both the mortgage interest deduction and depreciation deductions for larger investors, although the policy would include many exemptions and conditions.

Many economists are doubtful that large, corporate buyers are a major factor in housing costs. But whether deserved or not, they’ve become a convenient target for politicians hoping to tap into voters’ concerns about being able to afford the American dream.

President Donald Trump in his State of the Union address called for an outright ban on home purchases for institutional investors. And Republican Sen. Tim Scott of South Carolina released a joint proposal with Warren, adding a prohibition to a package of housing reforms that has been moving through Congress.

With backing from the White House, the legislation backed by Scott and Warren has received overwhelming support from the Senate in a series of procedural votes. But given the unpredictability of the legislative process, and some reservations among Republicans about the institutional investor ban, the tax alternatives likely aren’t out of the picture. And while these buyers are involved in a very small percentage of home purchases, the litany of definitions and exclusions involved could become a broader feature of the tax code.

If there’s one constant in tax policy, it’s that small changes can lead to large, unexpected consequences.

Recent Tax Pieces:

GOP Duo Renews Call for Treasury to Index Capital Gains – Cady Stanton, Tax Notes ($):

The letter revives a long-standing debate over the proposal that began in 1992 when the Treasury and Justice departments under the George H.W. Bush administration considered, then scrapped, a proposal to index capital gains through Treasury regulation.

The proposal resurfaced during President Trump’s first administration, shortly after the Tax Cuts and Jobs Act was enacted, when then-Treasury Secretary Steven Mnuchin suggested in 2018 that the move, which would effectively cut taxes on investment income, could be done under existing executive authority. Trump later backtracked on the idea, citing bad optics and disproportionate benefits.

‘No Tax on Overtime’ Isn’t All It Seems for Some Workers – Andrew Duehren, The New York Times:

Despite Mr. Trump’s “no tax” branding, overtime pay is still subject to taxes, including payroll taxes and, potentially, state taxes. Some people who work overtime won’t be able to claim the tax break at all. Only Americans who, according to the Fair Labor Standards Act, must be paid time and a half for working more than 40 hours in a week can claim it. And even then, only a portion of the overtime pay — the additional “half” in time and a half — is exempt from the federal income tax.

Even with those and other restrictions, the overtime deduction is among the biggest new tax cuts that the law is offering this year. Mr. Trump and Republicans are betting that changes like the overtime deduction, once they translate into larger-than-usual refunds in Americans’ bank accounts this spring, will stimulate the economy and help the party in the midterm elections.

Dems' Plan To Regain House Will Target Trump's Tax Policies – Stephen K. Cooper, Law360 Tax Authority ($):

During their annual policy conference in Leesburg, Virginia, Democrats said they plan to have a "laser focus" on highlighting the affordability crisis gripping the U.S. economy that they contend was caused by the GOP's total control of the House of Representatives, Senate and White House. Democrats at the conference met with policy and communications experts, Virginia Gov. Abigail Spanberger, labor leaders and former officials from Barack Obama and Joe Biden's administrations to strategize a winning message for November voters.

House Minority Leader Hakeem Jefferies, D-N.Y., said voters are unhappy with surging prices for housing, food and energy. Jeffries said it was made worse by what he said was the GOP's unfair tax law that unnecessarily rewards affluent taxpayers while leaving poorer Americans scrambling to find affordable health insurance without the enhanced tax credits under the Affordable Care Act .

Trump Child Savings Accounts Imitate and Innovate – Carrie Brandon Elliot, Tax Notes ($):

Child savings accounts have precedent in the United States as well as other countries. They typically have favorable tax treatment and are sometimes partly funded by government contributions. Tax-favored accounts for education expenses are not unusual — the United States, Canada, and other countries offer them. General-purpose child savings accounts, from which the beneficiary receives the funds at adulthood and can use them for any purpose, are more unusual but are offered by multiple countries. Child savings accounts earmarked for retirement purposes, like Trump accounts, are relatively rare.

Regardless of whether the savings are dedicated to a general purpose, education, or retirement, uniform policy elements arguably increase participation, operational efficiency, and financial returns. The Trump accounts have some, but not all, of those policy elements.

Evaluating the Material Assistance Rules and Coming Attractions – Marie Sapirie, Tax Notes($):

The notice provides detailed guidance on many questions, including some regarding the limited scope of the material assistance analysis. “The notice was helpful in limiting the inquiry to manufactured products and components, explicitly saying that steel and iron can be excluded, explaining that you don’t need to look at old equipment for purposes of the 80/20 analysis, and providing that with respect to an interconnection investment tax credit you can do a separate analysis for the interconnection property,” said Lauren Collins of Vinson & Elkins LLP. All of those items are useful, but not what was urgently needed by taxpayers, she said.

Capitol Hill Recap: Housing and Tax Politics

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Alex Parker