The report delivered on November 1 by the President’s Advisory Panel on Federal Tax Reform is a bomb that’s going nowhere but down. That’s good news for the housing sector!
The only real driver of fundamental change in the tax code is persistent encroachment by the alternative minimum tax (AMT), away from the original super-high-income parties that paid no taxes into the middle income classes where people pay plenty of taxes. Indeed, the Tax Reform Panel says that the AMT, if left alone, will increase taxes for more than 21 million taxpayers in 2006 and 52 million taxpayers by 2015 -- and the AMT will raise about $1.2 trillion over that 10-year period.
So why not just fix or eliminate the AMT? It’s because scaling back or eliminating the AMT creates a huge revenue “hole” that, as such, violates the President’s mandate that the tax reform package must be “revenue neutral,” i.e., must raise as much tax revenue as the current system would over the next 10 years. So it’s insistence on revenue neutrality that makes no sense when you’re starting out with a tax system that is deeply flawed. If the White House is so concerned about “protecting” the currently projected federal budget deficits, it would make more sense to just fix the AMT and make cuts to domestic discretionary spending.
The Tax Reform Panel may not be ultimately responsible for the ridiculous tax-increase exercise mandated by the twin requirements of AMT elimination and revenue neutrality. But the Panel had no mandate to strip economic and social policy from the tax code, under the guise that an economically neutralized tax code would lead to a more efficient use of economic resources--a refrain we’ve heard many times before. Congress justifiably will squawk that policy decisions made on Capitol Hill over many years cannot be neutralized away by some appointed tax panel.
Cuts of housing preferences in the current tax code are proposed by the Tax Reform Panel as a major step back to revenue neutrality--once AMT is eliminated. These cuts are “justified” on the grounds that current tax law directs too much capital into housing, particularly to the higher end of the market. Congress will justifiably take issue with this proposition, and there’s already a chorus of credible voices screaming that the Tax Panel’s proposals would cause major house price declines and damage the financial system and the overall economy. And there’s no way to write transition rules to forestall the price effect.
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