One of the most powerful lobbies in Washington is preparing a battle to preserve the strength what has always been untouchable in the tax world: the mortgage interest deduction.
Realtors, home builders and bankers have for decades successfully defended the $70 billion mortgage tax break, claiming that killing it would crater the housing market and undermine the American dream of home ownership for middle class taxpayers.
The break isn’t exactly on the chopping block with the ambitious tax reform plan of 2017, but the real estate industry fears the mortgage interest deduction will start to be weakened if lawmakers expand other deductions. And even though House Ways and Means Chairman Kevin Brady isn’t targeting the tax break, the National Association of Realtors, the National Association of Home Builders and their allies,are already acting like they’re going to war.
The groups have been circulating a photo of a stealth bomber and a doomsday message: “How Tax Reform Can Destroy the Tax Benefits of Home Ownership by Stealth.”
Because the blueprint raises the standard deduction to cut taxes for many low- and middle-income Americans, it makes the mortgage interest write-off less useful. That could discourage homeownership, especially among first-time buyers, and lead to higher tax bills over time, they said.
"We’re looking at the current draft plan as an assault,” NAHB Chief Executive Officer Jerry Howard said. “By raising the standard deduction you put money in people’s pockets, yes, but you’re not encouraging them how to use the money.”
The housing-industrial complex transcends partisan politics, geography and socioeconomic divisions and has almost never lost a fight. For more than a century, the lobby has defended the mortgage interest tax break from attack by presidents, Congress and even Nobel Prize-winning economists.
That record is a testament to the coalition’s deep pockets and skilled ground troops. For at least two decades, NAR has boasted the country’s biggest political action committee, funneling nearly $4 million to candidates this election cycle. The National Association of Homebuilders, banks and credit unions that profit from mortgages also regularly make the list of top donors.
Since 2008, the Realtor group also has leap-frogged General Electric, Koch Industries, Exxon Mobil, Blue Cross Blue Shield and other corporate giants to become Washington's second-biggest spender on lobbying. At $45 million so far this year, it ranks second only to the U.S. Chamber of Commerce, according to the Center for Responsive Politics.
It’s not just about money. NAR boasts 1.2 million members. NAHB’s 130,000 builders employ between 6 million and 8 million workers. Both groups are tightly wired into their communities. Their members vote in local elections, belong to Rotary clubs and serve on school boards.
They’ll need to harness all of that power to prevail this time around. Persuading Congress to preserve the American dream of homeownership is one thing; fighting a tax cut for lower-income households in an age of growing inequality is another.
The GOP blueprint delivers what NAR called a one-two punch that could hurt average homeowners and possibly slow the economy. A homeowner earning $65,000 a year who buys a $263,000 condo would see her tax benefits shrink from $3,325 to $166 a year.
That makes renting look a lot more attractive, and could discourage homeownership, particularly among young and lower-income adults.
“Congress decided 100 years ago that we wanted to encourage people to buy a home,” NAR Vice President Jamie Gregory said. “Expanding the standard deduction takes away that incentive.”
The homeownership lobby also is facing division within its ranks as more affordable-housing groups, civil rights organizations and economists eye cuts to the mortgage interest deduction as a way to free up government funding for low-income rentals.
Mortgage Bankers Association Chief Executive Officer David Stevens tiptoed into the debate in August, saying his group wasn't "religiously wed" to the tax break. His candid comment was a sign that the conversation, inside the Beltway at least, has shifted.
“For decades it’s been the untouchable third-rail program, but it’s on the table now,” said Diane Yentel, president and chief executive officer of the National Low-Income Housing Coalition. “There are Republicans open to reform despite the strong opposition and power of the homebuilders and Realtors.”
More politicians have reached for that third rail and survived. Ben Carson called for the elimination of the deduction while he was on the presidential campaign trail and is now set to lead HUD under incoming President Donald Trump.
Republican Ron Terwilliger, retired chief executive of Trammell Crow Residential, established a foundation in 2014 for the purpose of papering presidential candidates with research showing that a cut to homeownership subsidies could benefit rental housing and the economy overall. Foundation President Pam Patenaude is a contender for the No. 2 slot at HUD.
Last month, Steven Mnuchin, Trump’s pick for Treasury secretary, jumped on the bandwagon, telling CNBC that the home loan tax break, which since 1986 has allowed homeowners to deduct mortgage interest on loans of up to $1 million, needed to be cut down to size.
His comments set alarms ringing at NAR and NAHB. Two weeks later, incoming White House chief of staff Reince Priebus dialed back Mnuchin’s comments, saying nothing was a “done deal.”
Still, as worry builds that the tide is rising against them, the homeownership lobby has launched a strong defense suggesting that tax reform could trigger another housing collapse. This year, as tax reform started to gain steam, the NAHB endorsed congressional candidates for the first time. Ninety-six percent of its candidates won.
In a Dec. 16 letter to members of Congress, NAR called the Brady plan “potentially devastating” to housing and compared its effects to the housing collapse, which slashed home values by a third and sent millions of families into foreclosure. The trade group has hired accounting firm PwC to study what the blueprint would do to home prices and sales.
The approach has worked before. In the 1980s, when Republican Sen. Bob Packwood tried to cap the deduction at $250,000, NAR unleashed research showing that home prices would fall and sales would plummet more than 20 percent in some areas.
Presidential candidate Steve Forbes ran into the housing lobby a decade later when he campaigned on a flat tax that would have eliminated the deduction. During the Republican primary, housing groups flooded the New Hampshire airwaves with ads criticizing the proposal. Forbes finished fourth in the state.
“I love tax fights. It’s one of the few things in Washington that’s a zero-sum game,” Howard said. “We’re not going to lose.”