by John M. Curtis
(310) 204-8700

Copyright October 15, 2005
All Rights Reserved.

reating a new presidential commission on tax reform, President George W. Bush is scrambling to pay the whopping price tag for the Iraq War and hurricane Katrina, now threatening to drive the current federal deficit beyond reach. Earlier in the year, the Office of Management and Budget projected federal red ink, dropping fiscal ‘05 deficit from $412 billion to $319 billion. That was the good news before congressional appropriations pushed the tab for the Iraq War past $350 billion. Hurricane Katrina didn't help matters adding an additional $200 billion to current budget projections, throwing cold water on White House plans for more tax cuts. Now comes the double-whammy. Conceding that Congress isn't inclined to pass more tax cuts, Bush's new brainstorm involves backdoor tax hikes, threatening to dramatically change real estate tax deductions.

      Scaling back mortgage deductions, whether on first trust deeds or home equity lines, would have disastrous consequences for homeowners, already stretched thin by current installment debt. Without full deductability of mortgage loans, homeowners would be forced to pay unthinkable tax bills, neutralizing discretionary spending and harming an economy that leans heavily on consumer spending. Mortgage foreclosures and bankruptcies would skyrocket, despite attempts by new bankruptcy laws to no longer forgive credit card debt. It wasn't that long ago that Congress ended the deductibility of interest paid on installment debt. Since then, homeowners shifted plastic debt to home equity lines, something, together with today's real estate inflation, allowing lavish consumer spending. If Congress restricts mortgage interest deductions, the economy would see a paralyzing cash-flow crunch.

      During the height of the stock market boom in the late ‘90s, capital-gains taxes swelled the treasury, creating massive budget surpluses. Only eight years ago, Congress passed major revisions in real estate capital-gains, allowing couples to write of $500,000 in capital gains every two years. This change fueled the current real estate boom, creating unprecedented wealth but causing (a) unchecked real estate inflation and (b) dramatic loss of capital-gains revenues. “We need to review the reasonableness, appropriateness and effectiveness of such provisions,” said U.S. Comptroller David M. Walker, citing a study form the Government Accountability Office showing that the capital-gains exemption cost the treasury $29.7 billion a year. With the Iraq War, Katrina relief and the new Medicare prescription drug entitlement costing around $10 billion a month, deficits are out-of-control.

      President Bush treads on thin ice, trying to monkey with capital-gains breaks and mortgage interest deductions. Seventy-million homeowners won't take lightly threatening financial futures to subsidize a costly war and government entitlements for which they see no benefits. Bush's panel led by former Sens. Connie Mack (R-Fla.) and John B. Breaux (D-La.) are expected to submit recommendations to Treasury Secretary John W. Snow before Christmas. Seventy-million baby boomers also aren't willing to sacrifice Social Security benefits to democratize Iraq. No matter how well the economy performs, it can't keep pace with exploding government expenditures, especially an unending blank check in Iraq. Managing domestic disasters, subsidizing prescription drug benefits or assuring Social Security benefits is one thing but wasteful foreign expenditures can't be tolerated.

      Tampering with mortgage interest deductions threatens the American Dream of home ownership. Without mortgage interest deductions, homeownership would lose its financial advantage. “There's been a growing expectation that the framework for taxing housing could be revised,” said National Assn. of Realtors tax counsel Linda Goold, anticipating tax proposals designed to reduce loopholes and increase government receipts. Eliminating the alternative minimum tax also causes an expected loss of $1.2 trillion over the next decade, putting pressure on Bush's task force to close loopholes and generate more tax revenue. “The money has to be found by either raising rates or changing tax expenditures,” said panel member Elizabeth Garrett, preparing homeowners and real estate investors to expect major changes. While the party's not over yet, it's getting closer.

      No booming economy can keep up with the relentless pace of spending on Capitol Hill. Giving Bush an unlimited blank check to fund the Iraq War has forced the White House to find new revenue streams, now threatening homeowners, real estate investors and the overall economy. Tampering with the mortgage deduction would have disastrous consequences on the real estate market, hurting consumer spending, slowing economic growth and eventually and plunging the economy into recession. It's not real estate investors' fault that the White House chose a costly war now liquidating the federal treasury. Before the White House considers messing with the real estate market, it should seriously reconsider its spending priorities. Tinkering with capital-gains is one thing but messing with current mortgage and home equity interest deductions would send the economy into reverse.

About the Author

John M. Curtis writes politically neutral commentary analyzing spin in national and global news. He's editor of OnlineColumnist.com and author of Dodging the Bullet and Operation Charisma.

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