Trump tax plan would make mortgage break worthless for millions
By Prashant Gopal and Joe Light
U.S. Treasury Secretary Steven Mnuchin has taken pains to stress that the Trump administration isn’t out to kill Americans’ beloved mortgage-interest tax deduction—but a side effect of the plan could turn it into a perk for only the wealthy.
President Donald Trump has proposed rewriting the tax code to raise the standard federal deduction to a level where about 25 million homeowners would no longer take advantage of the century-old break. A married couple would need a home-loan balance of about $608,000—almost triple the mortgage on a median-priced U.S. home—before using it would make sense, according to a new analysis by property-data provider Trulia. That would be up from about $322,000 today.
Without the incentives, along with a proposed end to local property-tax deductions, home sales may be hurt in cities where prices are rising quickly and buyers are stretching to afford their purchases, from Denver and Portland, Oregon, to Boston and Washington. Reduced demand would weigh on values, causing price declines nationwide, according to the National Association of Realtors, which opposes the change.
The proposal “is a backdoor way of rendering the mortgage interest deduction close to worthless,” said Mark Zandi, chief economist for Moody’s Analytics Inc.
Americans filing their taxes can either subtract a fixed amount from their incomes, called the standard deduction, or itemize write-offs, including mortgage interest as well as state and local taxes. The administration wants to raise the standard allowance—to $24,000 from $12,700 for a married couple filing jointly—and allow deductions for only home loans and charitable donations, greatly reducing the chances that itemizing would pay off for average taxpayers.
A White House spokeswoman, Natalie Strom, said average families would be better off under the proposal. Low- and middle-income households would effectively get a tax cut, “putting more disposable income in their pockets for them to invest in a home, purchase a car, save for their children’s college—any other expense,” she said in an email.
Trump’s plan, outlined last month in a one-page proposal with few details and no provisions for how it might be paid for, amounts to a wish list. House Republicans came up with their own plan last June, which includes several controversial measures that have gotten a cool reception from the Senate as well as the White House.
Mnuchin called the mortgage break, which will cost the government an estimated $63.6 billion this year, “kind of like apple pie” and reiterated that Trump’s tax reforms wouldn’t touch it.
“Owning a home is something that’s been part of the American dream, and we want to keep it that way,” he said on May 1 at the Milken Institute Global Conference in Beverly Hills, California.
While Trump may not technically change the deduction, he would probably eliminate its usefulness for all but the most wealthy homeowners, said Joseph Rosenberg, a senior research associate for the nonpartisan Tax Policy Center.
The share of households that itemize would plunge to about 5 percent from about 30 percent now, according to a National Association of Realtors estimate. About 8 million families would itemize under Trump’s plan, a reduction of about 25 million.
The administration is “selling it as a sort of simplification,” said Rosenberg, noting that Americans who switch to the standard write-off wouldn’t pay more in taxes. “In some respects, they are embracing the fact that there would be fewer people who itemize and take these deductions.”
Taxpayers, however, would lose an incentive to take on mortgage debt, and buyers in expensive markets who are stretching to afford fast-rising home prices may start to re-evaluate how much they’re willing to spend. In Denver and Portland, Oregon, for example, potential buyers for about half the listings would no longer be able to justify itemizing because of mortgage interest alone, according to a Trulia analysis. The share is about double the national average of 22 percent in areas including Dallas, Seattle, Boston, Washington and Sacramento, California.
The impact of the switch would be greatest for middle-income renters who are thinking about making the jump to homeownership, according to Ralph McLaughlin, Trulia’s chief economist.
Prices may fall 10 percent on average nationwide, taking into account the lack of deduction for state and local property taxes, according to a preliminary estimate prepared by a consultant for the National Association of Realtors. Zandi of Moody’s said the proposed deduction changes would reduce prices by about 4 percent nationally, including the property-tax impact, with bigger decreases in pricier parts of the country.
If the government’s tax policy no longer favors homeownership, some renters may decide buying isn’t worth the hassle or expense. While buying a house for $517,000 is now cheaper than renting in all 100 markets measured by Trulia, that calculation would change under the Trump plan in 12 areas, including New York City; Portland, Oregon; and Madison, Wisconsin.
Reducing incentives to buy could benefit large publicly traded landlords, including Equity Residential and Avalon Bay Communities Inc., and single-family rental companies such as Blackstone Group LP’s Invitation Homes Inc. and Colony Starwood Homes, whose co-chairman, Tom Barrack, was a key Trump supporter.
Economists have long been critical of the mortgage-interest deduction because it disproportionately benefits people with more-expensive properties, including many who would have purchased even without the break. It also inflates home prices because buyers often overestimate their tax savings when they’re budgeting for a purchase, said Dennis Ventry, a professor at University of California, Davis, School of Law who has studied the program’s history.
Trump’s plan might end up boosting homeownership rates over time because a drop in prices would improve affordability and the standard deduction would give buyers more money to spend on a house, Ventry said.
The real estate industry is lining up against the proposal, including the powerful National Association of Realtors, which spent $10.2 million lobbying Congress in the first quarter, more than any other organization except the U.S. Chamber of Commerce, according to the Center for Responsive Politics. William E. Brown, the association’s president, said his group isn’t just fighting for its members.
“If values fall, it’s not just going to impact people who just bought houses, but all current homeowners,” Brown said.
Trump’s plan also targets tax deductions for state and local taxes paid—a provision that would especially hurt homeowners in states where property taxes are high. Coldwell Banker Realtor Kevin Cascone, who’s based in Westfield, New Jersey, took to Facebook on May 3 to persuade his followers to fight back by contacting their legislators: “NEW JERSEY HOMEOWNERS! This should concern you deeply,” Cascone wrote. “Regardless of your politics, the terms of this policy could SIGNIFICANTLY affect your wallets come tax season next year.”
“One of the big reasons for homeownership is the ability to deduct property taxes,” Cascone said. “If that’s eliminated, what’s the difference between renting and buying?”
Marc Shenkman, president of Priority Financial Network, a lender in Calabasas, California, said the vast majority of his customers itemize on their tax returns and would no longer take advantage of the mortgage-interest deduction if Trump’s proposal goes through.
“I can’t tell you how many people say ‘I’ve got to buy that house because I have to get the deduction,’” said Shenkman, whose firm makes about $1 billion a year in home loans. “It’s really a psychological thing more than anything.”
House GOP must bridge gaps on budget before moving to taxes
By Erik Wasson
House Republicans say they aren’t close to agreeing on a budget blueprint they have to approve before they can move ahead with one of their top priorities: a tax overhaul.
The biggest point of contention is over conservatives’ demands that the spending plan chart a path toward a balanced budget within 10 years. Republicans need to approve a budget resolution to activate a mechanism that will allow them to enact tax cuts without relying on Democratic votes in the Senate.
That will mean bridging persistent gaps between House moderates—who want military spending increases without President Donald Trump’s $54 billion in proposed cuts to domestic agencies next year—and conservatives, who want both to make those cuts and to cut deeper by slashing safety-net spending.
Trump plans to release his fiscal 2018 budget Tuesday, which is expected to provide his own path to a balanced budget. He is planning to propose $1.7 trillion in cuts to mandatory spending programs over the next decade, including Medicaid, according to a GOP aide. Those cuts target many programs aimed at helping lower-income Americans, including food stamps, known as the Supplemental Nutrition Assistance Program, which would be reduced by a quarter, or $193 billion, over 10 years.
Republicans’ inability—so far, at least—to find common ground in their own party shows why they’re having trouble moving ahead with their agenda even when they control both chambers of Congress and the White House.
The split has members fretting that the budget could face the same delays that have plagued efforts to repeal Obamacare, which the majority also tried to pass without any Democrats.
‘Like Health Care’
"It’s kind of like health care," said Representative Mike Simpson, a moderate Idaho Republican. "That’s a challenge."
Last year, the House was unable to put a budget resolution on the floor for votes after conservatives demanded $30 billion in immediate spending cuts that moderates rejected. When they acted on a budget resolution earlier this year—which they are trying to use to get rid of Obamacare—they agreed to ignore their goal of balancing the budget.
That won’t fly this time around.
"The only way that they can convince members to vote for one of these budgets is to say, ‘Hey, we’ve got to do this because it’s how we get reconciliation for tax reform,’" Simpson said.
Without a budget resolution, Republicans won’t be able to fast-track a tax overhaul through the Senate by insulating it from any Democratic filibuster.
New York Republican Tom Reed said that lawmakers know "getting a budget done is incredibly important for tax reform" and so will be motivated to bury differences this time.
"Passing anything in the House is difficult these days but we showed in health care that we could get the job done," he said. The House barely passed its Obamacare repeal bill, H.R. 1628, on May 4 by a vote of 217 to 213 after months of trying.
House Speaker Paul Ryan of Wisconsin and his team in the coming days will ramp up efforts to get his conference on the same budget page, a House leadership aide said.
The aide said lawmakers don’t yet fully realize the range of decisions needed to be made to move forward on the budget, taxes and the spending bills for next year.
Time to ‘Coalesce’
"Next week we will start to coalesce around a strategy. That doesn’t mean that it will all be ironed out," said Freedom Caucus Chairman Mark Meadows of North Carolina. Meadows said that his group plans to work with members of the moderate Tuesday Group, a strategy that helped the Obamacare repeal bill squeak through the House.
It remains to be seen how many of the Freedom Caucus’s three dozen members Meadows can bring along. Representative Justin Amash of Michigan, who is regularly at odds with his party, said that he needs to see cuts to mandatory spending, a category that includes Medicaid and food stamps, to vote for a budget.
"We’ve talked for years about how we would change things if we had total control of government. Well now we have the opportunity," he said. "If they are not really going to try, that will be disappointing."
Charlie Dent of Pennsylvania, a leader of the moderate Tuesday Group, said that he has two main concerns: making sure the budget cap for fiscal 2018, which stands at $1.065 trillion, provides enough funding for agencies and that instructions for a tax bill don’t call for spending cuts.
The House spending panel on which Dent sits cannot begin writing its bills without knowing the level of the budget cap. Republican members of the panel argue that since Senate Democrats will never agree to Trump’s proposed cuts, the cap may need to be raised for defense, or they will need to categorize it as emergency war funding.
"We don’t want to create expectations for bills that the Senate can’t pass," he said.
Dent’s push for robust agency funding was bolstered by a broad group of business leaders who wrote a letter on Monday to Secretary of State Rex Tillerson urging him to back a strong State Department budget ahead of Trump’s official budget announcement. It’s one example of the broad array of interests defending government programs—from scientific research to overseas advocacy—that successfully prevented Trump from getting the $18 billion in mid-year cuts he sought earlier this year.
Republican Study Committee Chairman Mark Walker of North Carolina, whose 170-member caucus leans conservative, predicted the differences can be overcome if the lessons of Obamacare repeal are learned.
"I don’t know that is going to be as difficult as the health-care bill but I do believe that there are going to be some hiccups as far whether we are going to bust the caps or where it is going long term," he said. "I hope we learned something from the American Health Care Act and we do the work up front and earlier."
The House Budget Committee, led by Chairwoman Diane Black of Tennessee, is aiming to vote on a budget resolution after Memorial Day. Whatever Black and her committee come up will then have to pass the House and be reconciled with a Senate budget resolution.
The RSC as soon as this week plans to release its own budget vision to help guide the negotiations. The author of that budget, Representative Tom McClintock of California, said conservatives and moderates will have to compromise.
"It will require enough of my colleagues to realize that they won’t find perfection in any piece of legislation," he said.
—With assistance from Steven T. Dennis
Companies spurned by top court on $1B Michigan tax change
By Greg Stohr
The U.S. Supreme Court refused to question a Michigan tax change that companies including IBM Corp. and Procter & Gamble Co. say will hit them retroactively with a $1 billion bill.
The companies argued that the change violates the U.S. Constitution and the Multistate Tax Compact, a 50-year-old agreement among states for dividing the taxes owed by companies that do business in multiple jurisdictions. The Supreme Court rejected the appeals without comment. Justice Samuel Alito didn’t participate in the cases.
Michigan state courts upheld the change, which was enacted through laws passed in 2007 and 2014. The first measure laid out a new formula for multistate companies to use in calculating their taxes, effective Jan. 1, 2008.
After the Michigan Supreme Court said companies could still use a different formula authorized by the Multistate Tax Compact, the state passed the 2014 law, which explicitly repealed that approach. The new measure applied retroactively to 2008.
The appeals argued that the Multistate Tax Compact is a contract, binding on the states that signed it. The companies also contended that the retroactive liability violated the Constitution’s due-process clause because the change upset settled expectations.
The companies that pressed the appeals also included Goodyear Tire & Rubber Co., Aetna Inc.’s Coventry unit, AT&T Inc.’s DirecTV unit, and the law firm Skadden Arps.
Michigan officials urged the Supreme Court not to hear the appeals, saying the 2014 measure merely clarified what the 2007 law intended.
The cases are Sonoco v. Michigan Department of Treasury, 16-687; Skadden Arps v. Michigan Department of Treasury, 16-688; Gillette v. Michigan Department of Treasury, 16-697; IBM v. Michigan Department of Treasury, 16-698; Goodyear v. Michigan Department of Treasury, 16-699; and DirecTV v. Michigan Department of Treasury, 16-736.
Trump's path to a balanced budget paved with accounting gimmicks
By Erik Wasson, Steven T. Dennis and Justin Sink
Presidents have long used creative math and budget gimmicks to create the illusion that the trillions of dollars in spending they propose will somehow wind up reducing the deficit. Donald Trump’s $4.1 trillion budget is especially ambitious: It combines many of the tricks his predecessors tried over the years, and adds a few of his own.
The White House said Trump’s request for fiscal 2018 would generate a fiscal surplus by 2027 after $3.6 trillion in spending reductions and $2.1 trillion in economic growth-induced revenue increases.
Those conclusions rely on phantom tax increases, unachievable spending cuts and unrealistic growth assumptions to avoid making hard choices that would be needed to get anywhere near a balanced budget.
Here’s how Trump’s team got the numbers to look like they add up:
No Tax Details
The administration’s biggest accounting sleight of hand is its failure to explain how Trump’s corporate and individual tax-rate cuts pay for themselves. The administration says it will reduce corporate tax rates to 15 percent and lower the top individual rate to 35 percent, but it doesn’t say what loopholes and deductions it would end to offset the revenue loss.
The independent Tax Policy Center estimated that Trump’s campaign tax plan would add $7.2 trillion to the deficit, while the nonpartisan Committee for a Responsible Federal Government put the cost at $5.5 trillion. The budget says the plan wouldn’t add a penny to the deficit, but it offers no detail.
David Stockman, former President Ronald Reagan’s budget director, said on his blog that since Trump has taken major tax deductions like mortgage interest and charitable giving off the table, the assumption that deep rate cuts will be offset isn’t justified.
"There are probably not enough politically achievable loopholes closers to fund even a 30 percent corporate and business tax rate," he wrote. "And even that would leave no room at all for personal tax cuts."
Steve Bell, who as Senate Budget Committee staff director helped consider Reagan’s first budget, recalled that Reagan in 1981 used a tax overhaul accounting move that may have been even bigger: a footnote promising "future savings to be identified," he said.
White House budget director Mick Mulvaney defended the Trump budget maneuver, saying that counting the tax plan as revenue-neutral "was the most reasonable option we had."
Treasury Secretary Steve Mnuchin pledged to be transparent about the Trump tax plan, eventually.
"We felt it was premature to put in any changes to the budget as a result of taxes since we are not far enough along to estimate what that impact will be," he said at an event sponsored by the Peter G. Peterson Foundation, which says it seeks long-term government fiscal solutions. Mnuchin said the cost of the tax cut won’t be "anything like $4 trillion or $5 trillion" and noted that the administration has proposed ending the state and local tax deduction for individuals.
he Trump budget is able to claim $2 trillion in additional revenue over the next decade because it forecasts real gross domestic product growth jumping to 3 percent by 2021 and staying at that level for years. Senate Budget Committee Republicans pointed out in their own analysis that this is above the 1.9 percent average growth that the Congressional Budget Office projects.
"An aging population and falling productivity make 3 percent growth very unlikely, as history and basic economics teaches us," Bell said.
Asked about criticism that the administration was cooking the books, Mulvaney said Tuesday that early Obama administration budgets projected rapid economic growth that never materialized.
In his 2012 budget request for example, President Barack Obama projected growth would jump from 2.7 percent in 2011 to 4.4 percent in 2013 and remain above 3 percent through 2016. Those numbers never materialized.
"Every presidential budget is aggressive and I don’t know that this is qualitatively different," Doug Holtz-Eakin, a former Republican-appointed Congressional Budget Office director, said of the Trump growth assumptions.
Even so, the nonpartisan Committee for a Responsible Federal Budget estimated that using the CBO’s growth assumptions, the budget would produce a $625 billion deficit in 2027. If the administration needs to rely on economic growth to make its tax plan pay for itself, then the deficit would be $1.1 trillion that year.
Trump has promised to rebuild the U.S. military through a spike in spending. He’s also pledged to build a border wall that could cost tens of billions of dollars, a spending increase that isn’t reflected in the budget.
The regular defense spending caps would rise by $489 billion over 10 years in the budget, but the budget is taking credit for cutting projected war funding from $70 billion in 2017 to $10 billion in 2027, an accounting trick that appears to erase the cap increase.
Overall, the budget claims nearly $600 billion in savings from paring back war funding, a gimmick that the Obama administration also used.
The administration budget expects the repeal and replacement of Obamacare to produce $250 billion in deficit savings over a decade, far more than the $150 billion the Congressional Budget Office estimated for an earlier version of the GOP health bill that narrowly passed the House earlier this month.
A final CBO score for the House-passed bill, which will reflect last-minute changes, is scheduled to be released Wednesday and is expected to show even lower budget savings.
Senate Republicans have shown deep unease with the Medicaid cuts in the House-passed Obamacare repeal bill. The budget claims that Trump can convince Congress to cut Medicaid by an additional $610 billion.
By contrast, Trump’s budget doesn’t even try to cut some of the government’s largest—and most popular—programs, like Social Security and Medicare.
"Anytime you project a balanced budget and keep Social Security and Medicare off the books, you have a credibility problem," said Holtz-Eakin.
Trump’s plan for a 40 percent reduction in non-defense discretionary spending by 2027 is also very unlikely. That would require sustained, deep spending cuts to nearly domestic agency of the government—and Congress already rejected all of Trump’s proposed cuts for fiscal 2017 when it passed an omnibus spending bill earlier this month.
It would take those accounts to just 1.7 percent of GDP, a level not seen in decades.
Democrats have insisted that any bipartisan spending deal won’t include significant domestic spending cuts.
Senate Majority Leader Mitch McConnell of Kentucky said Tuesday he expects to start negotiations with Democrats soon on a new spending cap soon.
"We’ll have to negotiate the top-line with Senate Democrats" he said.
Trump has sought to negotiate with Democrats on infrastructure spending and touted a $1 trillion investment. The budget makes clear that he only intends to spend $200 billion as part of that plan, relying on private investors to pony up the rest. But the budget elsewhere anticipates $95 billion in savings from cutting highway funding.
Trump's first budget would restrict eligibility for EITC and CTC
President Trump released his budget proposal Tuesday for the 2018 fiscal year titled "A New Foundation for American Greatness." The budget would aim to cut approximately $3.6 trillion in government spending over the next decade, some of which would be attributable to eligibility changes relating to the Earned Income Tax Credit (EITC) and the Child Tax Credit (CTC), and some of which would result from specific actions undertaken by the IRS to reduce improper payments made by the government.
In addition to the budget, the Administration also released a separate document describing major savings and reform proposals in the budget, as well as a "blueprint" providing details on discretionary funding proposals.
Big picture. In his budget proposal, in addition to "reprioritiz[ing] Federal spending", the President also highlighted a number of other major legislative goals that he views as central to achieving faster economic growth, including health care reform and tax reform. The passage of the American Health Care Act and the President's tax reform proposals are assumed in the budget. It is further assumed that the tax reform proposals are revenue-neutral.
As described in the budget, the President's tax reform objectives for American families include:
• Lowering individual income tax rates;
• Expanding the standard deduction and helping families struggling with child and dependent care expenses;
• Protecting homeownership, charitable giving and retirement saving;
• Ending the alternative minimum tax;
• Repealing the 3.8 percent net investment income tax; and
• Repealing the estate tax.
The tax reform objectives for businesses include:
• Reducing the business tax rate;
• Eliminating most special interest tax breaks; and
• Transitioning to a territorial system of taxation, including a one-time repatriation tax on already accumulated overseas income.
Tightened eligibility for the EITC and CTC: In order to claim either of these credits, the budget proposal would require taxpayers to provide a Social Security Number. The budget provides that this requirement is intended to limit these credits to those who are authorized to work in the U.S.
According to the "2018 Major Savings and Reforms" document, households who do not have SSNs that are valid for work may claim the CTC under current law, and "gaps in current administrative practice" allow some people who have SSNs that are not valid for work to claim the EITC.
The budget projects that adding this requirement would result in approximately $40.4 billion in reduced spending over a 10-year period.
Reduction of improper payments: The budget proposed to "curtail Government-wide improper payments by half through actions to improve payment accuracy and tighten administrative controls." Two of the action items to achieve this goal pertain to IRS: increase oversight of paid tax return preparers (which was projected to reduce improper payments by $439 million over the 10-year period), and provide more flexibility for the IRS to address correctable errors (which was projected to reduce improper payments by $655 million over the 10-year period). "Correctable errors" were not defined in President Trump's budget, but have been defined elsewhere as essentially broadening IRS's authority to correct simple errors in certain narrow circumstances, akin to IRS's existing authority to correct math errors.
IRS funding: The President requested $12.1 billion in discretionary resources for the Treasury Department’s domestic programs—a $519 million decrease from the 2017 annualized Continuing Resolution (CR) level. With respect to the IRS, the budget stated that it would ‘‘preserve key operations’’ to ensure IRS’s continued efforts to ‘‘combat identity theft, prevent fraud and reduce the deficit through the effective enforcement and administration of tax laws,’’ but would also achieve significant savings by ‘‘[d]iverting resources from antiquated operations.’’ Overall, the President requested a funding reduction of $239 million from the 2017 annualized CR level of $11.2 billion.
As described by Treasury Secretary Mnuchin, the budget "focuses Treasury on our core missions of collecting revenue and managing the nation's debt, while modernizing, streamlining and increasing efficiencies to reduce operating expenditures."
What's next? Whether any or all of the President's budget proposals become law is uncertain at this point. The process for passing a budget generally begins with the President submitting a comprehensive detailed budget request to Congress. Then, the House and Senate Budget Committees typically hold hearings on the President's budget request, inviting White House officials to testify, then pass their own respective budgets, which are in turn negotiated by the full House and Senate before passage of a single congressional budget resolution. The budget resolution is then the basis of annual appropriation bills.
Catherine Murray, J.D., LL.M. is a senior tax analyst with Thomson Reuters Checkpoint within the Thomson Reuters Tax & Accounting business.