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The Republican Tax Plan Wages War on the Housing Industry

CHICAGO, IL - MAY 15:  Workers install windows in a townhome complex under construction on May 15, 2017 in Chicago, Illinois. The National Association of Home Builders said today that its housing-market index rose by two points in May, a signal of a strengthening housing market. New home construction statistics for April will be released by the United States Census Bureau on May 16.  (Photo by Scott Olson/Getty Images)
GOP enemy No. 1? Scott Olson/Getty Images

There are lots of ways to think about the tax plan that House Republican leaders finally unveiled today. It is, as expected, a gift to large corporations, which would see their top tax rate plummet from 35 to 20 percent. It’s also a boon for children of wealth, who would no longer have to worry about the estate tax eating into their inheritance. Accountants should do well too if it passes, since many of the bill’s changes to the tax code are comically complicated.

But the thing that stands out most to me about this legislation is its  declaration of war against the housing industry. Politically, that may also be its greatest vulnerability.

The House GOP is looking to make a handful major changes that could put a dent in home  prices. First, it lowers the value of the mortgage interest deduction. Today, taxpayers can deduct interest on home loans worth up to $1 million. Republicans would drop the cap to $500,000 for future home  purchases, limiting its value for luxury real estate buyers (or families stuck house-hunting in San Francisco or New York).

The bill undercuts the mortgage interest deduction in another , more subtle way, by doubling the standard deduction that all Americans can take, to $24,000 for couples. As a result, fewer taxpayers are likely to itemize, which will reduce the tax advantages of owning.

Finally, it caps the amount of property taxes that families can deduct at $10,000. This, too, mostly affects the wealthy; it’s sure to be felt in some tony New York, New Jersey, and California suburbs.

There are some things to like about these changes. As I’ve written before, the mortgage interest deduction is a terrible piece of public policy in desperate need of reform. It’s a historical accident that, according to most analyses, has largely failed to encourage home-ownership, instead prompting Americans who can already afford a down payment to buy bigger houses. Its benefits also skew towards the wealthy. The GOP plan attacks it from both above and below, significantly narrowing its benefits. Few voters will lose sleep over the fact that hedge funders in Greenwich, Connecticut won’t be able to deduct as much of their property taxes.

With all that said, these overnight changes are also very likely to drag down real estate prices all across the country. The mortgage-interest deduction is baked into the value of today’s homes, and seriously curtailing it will hurt their worth (though exactly how much is a little difficult to say). That may sound appealing to young renters looking to one day buy. It’ll be less pleasing to the nearly two-thirds of Americans who currently own.

And it’s going to cause a riot among people who make a living buying and selling houses. The National Association of Home Builders has come out hard against the bill, warning that it could cause “a national housing recession.” The realtors lobby says the bill appears to “confirm many of our biggest concerns” about the GOP’s plan. “Eliminating or nullifying the tax incentives for homeownership puts home values and middle class homeowners at risk, and from a cursory examination this legislation appears to do just that.” These are powerful interests spread across every congressional district in the country, who are threatening campaign aimed at convincing home-owners that this tax bill will kill their home equity. I’d say that it’s impressive that Republicans decided to pick this battle, except that they’re doing it largely for the sake of tax cuts aimed at Walmart and Exxon shareholders.

The bill fires a much larger shot at the housing industry than most expected. The changes to the standard deduction were long anticipated, and there had been lots of speculation that the GOP would do away with the state and local tax deduction entirely (in comparison, simply capping property tax breaks is a gentler move). People did not expect Republicans to go after the mortgage interest deduction directly by lowering its cap. In doing so, they’ve upped the ante.

You can sort of see the political logic if you squint hard enough. The home building lobby announced it would oppose the bill last week, as soon as it became clear the legislation would not contain a new credit for homeowners. Republican leaders may have figured that if they were picking a fight with real estate interests, they might as well try to squeeze as much revenue out of them as possible, since they’re already struggling to limit the budget done by this bill.

But as a result, they’re setting up an extremely high-stakes battle — not just with a powerful industry, but possibly with every homeowner in America.

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