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Thursday, May 3, 2012

Romney, second homes and challenges of needed tax reform

Mr. Romney was right to suggest a deduction that should end is the one for interest on debt on a second home. There is no reason for the tax law to subsidize ownership of a second home. While Romney only suggested it for high income individuals, he got some flack for it and backed down. This is a good indication that tax reform won't happen because individuals want to keep special rules even if they make the tax law more complex, inequitable and need high tax rates to support them. See, for example this article from the newsobserver.com.

A few more observations:

1. Romney doesn't have mortgage debt - check his Schedule A. This is not surprising. With his wealth and low interest rates, why have a mortgage?

2. The mortgage interest deduction on a second home doesn't affect many people. First, only 1/3 of individuals even itemize deductions and not all of them even have a debt on their personal residence and most don't own a second home.  Also, many high income like Romney, likely don't have debt on their second home.

3. There is no reason for the tax law to incentivize ownership of a second home so this deduction should have disappeared back in the Tax Reform Act of 1986.

4. How will tax reform happen if candidates aren't bold enough to take the time to educate the public on the reasons why this (any many other tax breaks) should go away?  The "cost" of the second home mortgage deduction could be used more equitably to benefit more taxpayers.

5. The mortgage interest deduction should be fixed as suggested by President Bush's Tax Advisory Panel - remove the deduction for home equity loans and second home mortgages and reduce the limit for acquisition debt on a principal residence to be closer to the regional median home price and convert the deduction to a credit.  See pages 61 and 70.

6. While Romney doesn't have debt on his homes, he paid and reported $226,000 of property tax on his 2010 Schedule A.  I would not be surprised if the aggregate amount of property tax paid on second homes exceeds the mortgage interest (because Schedule A of 1040 doesn't require mortgage interest or property taxes to be reported separately for principal residences and other residences, I don't think the data is readily available).  Why doesn't he also suggest that only property taxes on a principal residence be deductible?  After all, there is no need for others to subsidize property taxes paid on homes beyond the first one (and even for the first home, there should be a cap). Note that many individuals lose their property tax deduction due to AMT.

What do you think?

3 comments:

steve yarnall said...

http://crfb.org/stabilizethedebt/

this is great tool to get a flavor for what the aspiring candidates, prez & congress people are wrestling with regarding taxes...I think minimizing the tax write offs from mortgages might help limit an industry that appears to have triggered the 2008 financial crisis...

Peter Reilly said...

I'm too lazy to dig up Romney's return but if I remember correctly he is not getting any benefit from that property tax deduction. Both he and the prez are in AMT.

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