[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]


                 TAX REFORM AND RESIDENTIAL REAL ESTATE

=======================================================================

                                 HEARING

                               BEFORE THE

                      COMMITTEE ON WAYS AND MEANS
                     U.S. HOUSE OF REPRESENTATIVES

                    ONE HUNDRED THIRTEENTH CONGRESS

                             FIRST SESSION

                               __________

                             APRIL 25, 2013

                               __________

                          Serial No. 113-FC06

                               __________

         Printed for the use of the Committee on Ways and Means
         
         
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                      COMMITTEE ON WAYS AND MEANS

                     DAVE CAMP, Michigan, Chairman

SAM JOHNSON, Texas                   SANDER M. LEVIN, Michigan
KEVIN BRADY, Texas                   CHARLES B. RANGEL, New York
PAUL RYAN, Wisconsin                 JIM MCDERMOTT, Washington
DEVIN NUNES, California              JOHN LEWIS, Georgia
PATRICK J. TIBERI, Ohio              RICHARD E. NEAL, Massachusetts
DAVID G. REICHERT, Washington        XAVIER BECERRA, California
CHARLES W. BOUSTANY, JR., Louisiana  LLOYD DOGGETT, Texas
PETER J. ROSKAM, Illinois            MIKE THOMPSON, California
JIM GERLACH, Pennsylvania            JOHN B. LARSON, Connecticut
TOM PRICE, Georgia                   EARL BLUMENAUER, Oregon
VERN BUCHANAN, Florida               RON KIND, Wisconsin
ADRIAN SMITH, Nebraska               BILL PASCRELL, JR., New Jersey
AARON SCHOCK, Illinois               JOSEPH CROWLEY, New York
LYNN JENKINS, Kansas                 ALLYSON SCHWARTZ, Pennsylvania
ERIK PAULSEN, Minnesota              DANNY DAVIS, Illinois
KENNY MARCHANT, Texas                LINDA SANCHEZ, California
DIANE BLACK, Tennessee
TOM REED, New York
TODD YOUNG, Indiana
MIKE KELLY, Pennsylvania
TIM GRIFFIN, Arkansas
JIM RENACCI, Ohio

        Jennifer M. Safavian, Staff Director and General Counsel

                  Janice Mays, Minority Chief Counsel


                            C O N T E N T S

                               __________

                                                                   Page

Advisory of April 25, 2013 announcing the hearing................     2

                               WITNESSES

Mark A. Calabria, Ph.D., Director of Financial Regulation 
  Studies, Cato Institute, Washington, DC........................    45
Robert Dietz, Assistant Vice President for Tax and Policy Issues, 
  National Association of Home Builders, Washington, DC..........   125
Mark Fleming, Ph.D., Chief Economist, CoreLogic, McLean, VA......     6
Jane G. Gravelle, Senior Specialist in Economic Policy, 
  Congressional Research Service, Washington, DC.................    33
Thomas F. Moran, Chairman and Managing Partner, Moran & Company, 
  Chicago, IL, on behalf of the National Multi Housing Council 
  and the National Apartment Association.........................   161
Robert Moss, Senior Vice President, Boston Capital, Boston, MA, 
  on behalf of the Housing Advisory Group........................   174
Phillip L. Swagel, Professor of International Economic Policy, 
  University of Maryland School of Public Policy, College Park, 
  MD.............................................................    64
Gary Thomas, President, National Association of Realtors, 
  Washington, DC.................................................   103
Eric J. Toder, Institute Fellow, Urban Institute, and Co-
  Director, Urban-Brookings Tax Policy Center, Washington, DC....    12

 
                 TAX REFORM AND RESIDENTIAL REAL ESTATE

                              ----------                              


                        THURSDAY, APRIL 25, 2013

                     U.S. House of Representatives,
                               Committee on Ways and Means,
                                                    Washington, DC.

    The Committee met, pursuant to call, at 9:38 a.m., in Room 
1100, Longworth House Office Building, Hon. Dave Camp [Chairman 
of the Committee] presiding.

    [The advisory announcing the hearing follows:]

ADVISORY FROM THE COMMITTEE ON WAYS AND MEANS
FOR IMMEDIATE RELEASE                  CONTACT: (202) 225-3625
                                               

Thursday, April 18, 2013
No. FC-06

                       Camp Announces Hearing on

                 Tax Reform and Residential Real Estate

    Congressman Dave Camp (R-MI), Chairman of the Committee on Ways and 
Means, today announced that the Committee will hold a hearing on 
Federal tax provisions that affect residential real estate as part of 
the Committee's continued work on comprehensive tax reform. The hearing 
will take place on Thursday, April 25, 2013, in Room 1100 of the 
Longworth House Office Building, beginning at 9:30 a.m.
      
    In view of the limited time available to hear witnesses, oral 
testimony at this hearing will be from invited witnesses only. However, 
any individual or organization not scheduled for an oral appearance may 
submit a written statement for consideration by the Committee and for 
inclusion in the printed record of the hearing.
      

BACKGROUND:

      
    A number of different Federal tax provisions directly affect 
residential real estate and the housing sector. The mortgage interest 
deduction and the deduction for State and local real property taxes are 
available to the roughly one-third of taxpayers who itemize their 
deductions, but not to the roughly two-thirds of taxpayers who instead 
take the standard deduction. For some taxpayers, however, these 
deductions are reduced by the recently reinstated ``Pease'' limitation 
on itemized deductions, and the real property tax deduction is 
completely disallowed for taxpayers subject to the Alternative Minimum 
Tax (AMT). Other significant housing-related tax provisions include the 
exclusion of gain on the sale of a principal residence, the low-income 
housing tax credit, the temporary exclusion from income of cancellation 
of mortgage debt, and numerous other provisions.
      
    In announcing this hearing, Chairman Camp said, ``As we continue to 
work toward comprehensive tax reform that makes the Code simpler and 
fairer so that more jobs with better pay are created, it is important 
to do a top to bottom review of the Code. Home ownership is an integral 
part of the American dream, and the Tax Code has long provided a 
variety of incentives to make it easier for families to buy and own a 
home. Before considering any proposal, the Committee must better 
understand how tax reform might affect the housing sector and this 
hearing is an opportunity to hear directly from both academic experts 
and industry stakeholders.''
      

FOCUS OF THE HEARING:

      
    The hearing will consider how certain Federal tax provisions affect 
the housing sector and home ownership--and the benefits of such 
investment. It will explore how tax policy affects the relative level 
of investment between residential real estate and other parts of the 
economy (such as business investment).
      

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

      
    Please Note: Any person(s) and/or organization(s) wishing to submit 
written comments for the hearing record must follow the appropriate 
link on the hearing page of the Committee website and complete the 
informational forms. From the Committee homepage, http://
waysandmeans.house.gov, select ``Hearings.'' Select the hearing for 
which you would like to submit, and click on the link entitled, ``Click 
here to provide a submission for the record.'' Once you have followed 
the online instructions, submit all requested information. ATTACH your 
submission as a Word document, in compliance with the formatting 
requirements listed below, by the close of business on Thursday, May 9, 
2013. Finally, please note that due to the change in House mail policy, 
the U.S. Capitol Police will refuse sealed-package deliveries to all 
House Office Buildings. For questions, or if you encounter technical 
problems, please call (202) 225-3625 or (202) 225-2610.
      

FORMATTING REQUIREMENTS:

      
    The Committee relies on electronic submissions for printing the 
official hearing record. As always, submissions will be included in the 
record according to the discretion of the Committee. The Committee will 
not alter the content of your submission, but we reserve the right to 
format it according to our guidelines. Any submission provided to the 
Committee by a witness, any supplementary materials submitted for the 
printed record, and any written comments in response to a request for 
written comments must conform to the guidelines listed below. Any 
submission or supplementary item not in compliance with these 
guidelines will not be printed, but will be maintained in the Committee 
files for review and use by the Committee.
      
    1. All submissions and supplementary materials must be provided in 
Word format and MUST NOT exceed a total of 10 pages, including 
attachments. Witnesses and submitters are advised that the Committee 
relies on electronic submissions for printing the official hearing 
record.
      
    2. Copies of whole documents submitted as exhibit material will not 
be accepted for printing. Instead, exhibit material should be 
referenced and quoted or paraphrased. All exhibit material not meeting 
these specifications will be maintained in the Committee files for 
review and use by the Committee.
      
    3. All submissions must include a list of all clients, persons and/
or organizations on whose behalf the witness appears. A supplemental 
sheet must accompany each submission listing the name, company, 
address, telephone, and fax numbers of each witness.
      
    The Committee seeks to make its facilities accessible to persons 
with disabilities. If you are in need of special accommodations, please 
call 202-225-1721 or 202-226-3411 TDD/TTY in advance of the event (four 
business days notice is requested). Questions with regard to special 
accommodation needs in general (including availability of Committee 
materials in alternative formats) may be directed to the Committee as 
noted above.
      
    Note: All Committee advisories and news releases are available on 
the World Wide Web at: http://www.waysandmeans.house.gov/.

                                 -------

    Chairman CAMP. Good morning. The Committee will come to 
order.
    Good morning and thank you for joining us today as we 
continue our dialogue with individuals, families, and job 
creators of all sizes about the critical steps that Congress 
can take through tax reform to get our economy back on solid 
footing.
    My position is well known: It is important for Congress to 
fix our broken Tax Code. As anyone in this room who just 
completed their taxes in the last few weeks will tell you, 
today's Tax Code is far too complex, it takes far too much time 
and too much money to comply with. And while I often joke that 
the Code is more than 10 times the size of the Bible with none 
of the good news, what I should also add is that not everything 
in the Code is bad. However, with more than 4,000 changes made 
to the Tax Code in the last decade alone, more than one per 
day, it is tough to imagine that all those changes have made 
the Code more user friendly. It is just the opposite. And that 
is why we owe it to the American people to go line by line 
through the Code to see how we can make it work better for 
hard-working taxpayers, not just those who can afford a good 
accountant.
    The two primary keys to tax reform are to make the Tax Code 
simpler, fairer, and more transparent for families and 
employers, and to strengthen the economy so that we can create 
more jobs and increase wages for American families.
    So today, as part of our top-to-bottom review of the Code, 
we will examine how tax policy related to residential real 
estate lines up with those goals, and we will do so with two 
questions in mind. Does current tax policy help American 
families and does it make our economy stronger?
    Home ownership is an integral part of the American dream, 
and the Tax Code has long provided a variety of incentives to 
make it easier for families to buy and own a home. We also know 
that the real estate industry plays a large role in our 
economy. So this is an area that needs careful, thoughtful 
review.
    A number of Federal tax preferences provide for benefits 
for residential real estate. While some are very familiar, 
others are lesser known. Although these provisions all pertain 
to housing, each is governed by different rules and criteria. 
If we are looking to understand how complex, confusing and 
costly our Code can be, consider just a few of the following 
examples involving residential real estate.
    Perhaps the most well known tax provision affecting real 
estate is the mortgage interest deduction, which has specific 
rules and limitations. For instance, only taxpayers who itemize 
their deductions may deduct mortgage interest. Other 
interactions within the Tax Code can also limit the use of this 
provision.
    By way of example, the deduction for interest on home 
equity indebtedness is disallowed for purposes of the 
alternative minimum tax. Furthermore, Federal tax benefits for 
real estate treat homeowners differently than renters. A 
taxpayer who pays $1,000 per month to rent an apartment may not 
deduct that amount from income, but a taxpayer who pays 
mortgage interest of $1,000 may take a deduction if they 
itemize.
    Though these examples are from real estate provisions, this 
complexity plagues the entire Code and underscores one simple 
fact: The Tax Code is a mess. You shouldn't need an army of 
lawyers and accountants to understand our Tax Code and it 
shouldn't take American taxpayers over 6 billion hours and $168 
billion every year to comply with the Code. We should get rid 
of the loopholes in the Code and make it more efficient and 
effective for hard-working taxpayers.
    However, as we get started today, let me emphasize that not 
every credit or deduction is a loophole. The largest investment 
most people have is their home. And as I noted earlier, 
policies like the home mortgage interest deduction have played 
a big role in home ownership.
    I also believe that tax reform, which can help us to create 
a stronger economy with higher paychecks, is one of the best 
ways we can help families struggling to save for college, save 
for retirement, or of particular interest to some on our second 
panel today, save for a downpayment on that first home.
    So I look forward to the testimony of both panels today and 
I hope that the witnesses will help this Committee better 
understand how we can balance the goal of that simpler and 
fairer Code with the needs facing consumers in the residential 
marketplace. Both are important to American families, and your 
expertise and insight will be critical to all of us in meeting 
their needs.
    Thank you.
    I will now recognize the Ranking Member for his opening 
statement.
    Mr. LEVIN. Thank you, Mr. Chairman. Welcome to our panel.
    The topic before us is an important one. The Federal 
Government, through the Tax Code, has been involved in 
promoting home ownership for over a century. Let's be clear: 
There are many egregious loopholes in the Tax Code, but the 
main provisions incentivizing home ownership are policies, not 
loopholes.
    The failure to differentiate which is which between 
policies and real loopholes has led to some facile proposals. 
Among them are proposals that begin without the mortgage 
interest or any other deductions, or proposals that simply pick 
a much lower tax rate than present law without any suggestions 
as to how to fill the trillions in lost revenue that would 
result.
    Such proposals have failed to take into account some basic 
facts, including the growing income gap, and they have failed 
to consider adequately whether policies are significant for a 
strong middle class or mainly for very wealthy families. 
According to the Joint Committee on Taxation, two-thirds, 70 
percent of the benefit of the mortgage interest deduction goes 
to households earning less than $200,000 a year. Less than a 
third of the benefit, 30 percent, goes to those who make more 
than that.
    By comparison, the reduced rate for capital gains almost 
exclusively benefits the very wealthy. More than 70 percent of 
the benefit of that lower rate flows to people making more than 
$1 million a year, just 12 percent to those making less than 
$200,000.
    These tax policies deserve, indeed, serious consideration 
beyond the easy rhetoric about simply broadening the base and 
reducing rates. So I hope that today this hearing will be a 
step in the direction of this serious consideration.
    Thank you, Mr. Chairman.
    Chairman CAMP. Well, thank you, Mr. Levin.
    Now it is my pleasure to welcome our first panel of 
experts, all of whom bring a wealth of experience from a 
variety of perspectives. Their experience and insights will be 
very helpful as the Committee considers the impact of Federal 
tax reform on residential real estate.
    First, I would like to welcome Mark Fleming, the Chief 
Economist at CoreLogic. Mr. Fleming has over 15 years of 
experience in the mortgage and property analysis business.
    Second, we will hear from Eric Toder, Institute Fellow at 
the Urban Institute and Co-Director of the Urban-Brookings Tax 
Policy Center in Washington, D.C. Mr. Toder is a veteran of the 
Treasury Department, CBO, and the IRS.
    Third, we will hear from Jane Gravelle, Senior Specialist 
in Economic Policy and a long-time veteran of the Congressional 
Research Service.
    Fourth, we will hear from Mark Calabria, Director of 
Financial Regulation Studies at the Cato Institute, also in 
Washington, D.C. Mr. Calabria has had a broad career, spending 
time at HUD, the National Association of Home Builders, the 
National Association of Realtors, and the Senate Banking 
Committee.
    Finally, we will hear from Phillip Swagel, Professor of 
International Economic Policy at the University of Maryland 
School of Public Policy in College Park. Mr. Swagel is a former 
Assistant Secretary for Economic Policy at the Treasury 
Department.
    And thank you all for being with us today. The Committee 
has received each of your written statements and they will be 
made part of the formal hearing record. Each of you will be 
recognized for your oral remarks for 5 minutes.
    And so, Mr. Fleming, we will begin with you. You have 5 
minutes. Welcome.

 STATEMENT OF MARK FLEMING, PH.D., CHIEF ECONOMIST, CORELOGIC, 
                           MCLEAN, VA

    Mr. FLEMING. Thank you. Chairman Camp, Ranking Member 
Levin, and distinguished Members of the Committee on Ways and 
Means, CoreLogic appreciates the opportunity to submit this 
testimony regarding tax reform and residential real estate.
    My name is Mark Fleming, and I am Chief Economist for 
CoreLogic, a leading global provider of consumer, financial, 
and property information, analytics and services to businesses 
and government. Our company combines public, contributory, and 
proprietary data to develop predictive decision analytics and 
provide business services that bring dynamic insights to our 
customers in the residential mortgage origination, 
securitization, and servicing markets, as well as other private 
sector institutions and government.
    One of the brightest spots within the uneven economic 
recovery at the moment is the housing sector. Residential 
investment contributed about half a percentage point to GDP 
growth in Q4 of 2012, very significant for a single industrial 
sector. In March of 2013, residential investment continued to 
grow. Housing starts increased to an annualized rate of 1 
million, which is 47 percent above the level for the same month 
a year earlier and the largest increase in more than 20 years. 
Home prices consequently have rose 10.2 percent year-over-year, 
the largest increase in nearly 7 years, and our pending house 
price index indicates that price growth in March will continue 
the trend.
    One of the features of the American Recovery and 
Reinvestment Act of 2009 was a first-time home buyer tax credit 
aimed at stimulating the real estate sales market. In the first 
half of 2009, before the impact of the tax credit could be 
felt, home sales were declining at a rate of 15 percent from 
the prior year. However, by September of 2009, sales were at 
the same level as the prior year, and by November 2009, the 
month of expiration, sales were up 34 percent from the prior 
year, nearly a 50 percentage point improvement in under 1 year.
    When the tax credit was extended to April of 2010, sales 
increased at an average rate of 12 percent annualized until 
expiration of the credit. However, as soon as the tax credit 
expired, the volume of home sales dropped, averaging a rate of 
18 percent annualized for the remainder of the year. 
Furthermore, prior to the expiration of the tax credit, 
expensive home sales increased more rapidly than low and 
moderately priced home sales. The tax credit stimulated current 
demand at the expense of future demand, but did not have a 
permanent impact on the market.
    While the first-time home buyer tax credit resulted in home 
buyers buying sooner than otherwise, the Tax Relief Act of 1997 
causes a subset of sellers to defer sales to a later date. The 
Tax Relief Act exempts from taxation the profits on the sale of 
a residence of up to $500,000 for married couples filing 
jointly and $250,000 for singles if the property has been a 
principal residence in 2 of the last 5 years.
    Since the Act's tax exclusion can only be applied if the 
owner has been living in the property for at least 2 years, it 
clearly applies to existing homes and not new homes. Therefore, 
the law only impacts existing home sales, but not new sales. 
For the 5 years prior to 1997, the existing home sales share of 
total sales, new and existing combined, averaged 84 percent. 
However, as discussion of the Act became public, the share 
declined to below 83 percent as sellers waited for the law to 
be enacted, so as to take advantage of the tax exclusion. After 
the law was enacted, the share rose above the previous average 
for several months, before returning to its long-term average. 
In the case of the first-time home buyer tax credit and the 
capital gains tax exclusion, market participants changed their 
behavior in the short term.
    The existing literature on the societal value of home 
ownership generally shows that, relative to renting, home 
ownership is associated with better-cared-for homes, increased 
participation in the community, and better students with lower 
likelihood of needing welfare. Assuming that increasing home 
ownership to capture these social benefits is a goal of tax 
policy, there is a significant amount of economic literature 
that studies existing and proposed policies and their 
implications for the decision to own versus rent, the amount of 
house consumed, and the implications of policy changes on house 
prices.
    CoreLogic is thankful to the Committee for the opportunity 
to provide testimony on the meaningful impact that tax policy 
has on participants in the real estate market. We are 
encouraged by the Committee's recognition of how data and 
analytics can help inform a better understanding of the 
relationship between tax policies and the real estate market, 
especially as the housing market once again contributes to our 
fragile economic recovery. Thank you.
    [The prepared statement of Mr. Fleming follows:]
    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
    
    Chairman CAMP. Well, thank you, Mr. Fleming.
    Mr. Toder, you are recognized for 5 minutes.

STATEMENT OF ERIC J. TODER, INSTITUTE FELLOW, URBAN INSTITUTE, 
AND CO-DIRECTOR, URBAN-BROOKINGS TAX POLICY CENTER, WASHINGTON, 
                               DC

    Mr. TODER. Thank you very much.
    Chairman Camp, Ranking Member Levin, and Members of the 
Committee, thank you for inviting me to testify today on 
reforming the mortgage interest deduction. My statement 
represents my views alone and should not be attributed to the 
Tax Policy Center or to the Urban Institute, its trustees, or 
its funders.
    The mortgage interest deduction is one of the largest 
individual tax preferences in the Internal Revenue Code. The 
Joint Tax Committee estimates it will cost $380 billion between 
2013 and 2017. The Tax Policy Center estimates that about 40 
million taxpayers will benefit from the deduction in 2015.
    The current mortgage interest deduction does little to 
promote home ownership because it provides no subsidy to 
taxpayers who do not itemize deductions and only a very modest 
subsidy to taxpayers in the 15 percent bracket. The subsidy 
value is largest for families in high tax brackets, who are the 
ones most likely to own a home without a subsidy. Other 
countries without a mortgage interest deduction have home 
ownership rates as high or higher than the United States. 
Instead, the deduction mostly encourages homeowners to buy 
larger and more expensive homes with borrowed money.
    Either a uniform percentage tax credit for mortgage 
interest or an investment credit for first-time home purchase 
would be a more effective home ownership subsidy. Replacing the 
deduction with an interest credit has been endorsed by the 
President's Advisory Panel on Federal Tax Reform appointed in 
2005 by President Bush, the National Commission on Fiscal 
Responsibility and Reform, and the Debt Reduction Task Force of 
the Bipartisan Policy Center. Other proposed reforms include 
reducing the size of a mortgage qualifying for a subsidy, 
limiting the subsidy to a principal residence, and eliminating 
the subsidy for home equity.
    The tables in my testimony display the effects on tax 
burdens and average tax rates of four potential reforms: 
Eliminating the deduction, limiting it to interest on the first 
$500,000 of home acquisition debt, replacing it with a 15 
percent refundable credit on the first $25,000 of eligible 
interest, and replacing it with a 20 percent nonrefundable 
credit for interest on the first $500,000 of home acquisition 
debt. All of these options would raise taxes the most on upper-
middle-income taxpayers, and replacing the deduction with a 
credit would reduce tax burdens on average in all groups in the 
bottom 80 percent of the income distribution.
    The revenue gains, I should note, from all these options 
would be lower if introduced as part of a reform that lowered 
marginal income tax rates. With lower rates, eliminating 
deductions raises less money, but new credits would cost just 
as much.
    Proposals to pare back the mortgage interest deduction 
could adversely affect housing prices. Reform should be 
introduced slowly to avoid risks to the housing market, but 
transition rules would reduce revenue gains from the options 
and delay their benefits.
    In conclusion, the mortgage interest deduction is difficult 
to justify on policy grounds. It does little to encourage home 
ownership, but instead mostly encourages upper-middle-income 
households to buy larger and more expensive homes. Converting 
the deduction to a credit, placing additional limits on the 
amount of debt eligible for the subsidy, and denying the 
preference to home equity loans and second homes would result 
in a larger home ownership subsidy to those who might act on it 
at a lower fiscal cost.
    But any reform undertaken must take account of short-run 
adverse effects on housing markets. Designing appropriate 
transition rules that prevent market disruption, while 
retaining the benefits of removing or redirecting the 
preference, will be challenging. Thank you very much.
    [The prepared statement of Mr. Toder follows:]
    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
    
    Chairman CAMP. Thank you very much, Mr. Toder.
    Ms. Gravelle, you are recognized for 5 minutes.

 STATEMENT OF JANE G. GRAVELLE, SENIOR SPECIALIST IN ECONOMIC 
     POLICY, CONGRESSIONAL RESEARCH SERVICE, WASHINGTON, DC

    Ms. GRAVELLE. Thank you.
    Since the interest in housing tax expenditures is part of a 
general investigation of broadening the income tax base to 
either permit a lower rate or to prevent rates from rising, I 
would like to begin first with some general comments on tax 
reform, based on a CRS report that we did last summer.
    First, it is very difficult to identify base-broadening 
provisions in general that might allow significant rate 
reductions. About 30 percent of tax expenditures relate to 
savings incentives, such as retirement savings, exempting 
capital gains at death, and lower rates on capital gains and 
dividends, which some who are concerned about saving would 
probably like to retain. Others are unlikely candidates for 
technical reasons or because they are crucial to low-income 
individuals or because of particular merits or popularity and 
broad use. Our analysis suggested very limited possibilities 
for rate reduction.
    It is even more difficult to identify provisions that would 
allow significant reductions of the top rate while maintaining 
the current distribution of tax benefits. About 70 percent of 
the revisions we identified as being significant at the top, 
again, were related to savings.
    Finally, if the goal of lowering tax rates is to encourage 
supply-side responses, base broadening increases effective 
marginal tax rates in the same way as statutory rate increases, 
because if part of an additional dollar of income is devoted to 
a tax-deductible use, eliminating that deduction will raise the 
share of taxes paid at the margin. For example, eliminating all 
itemized deductions, we estimated, would allow a statutory rate 
reduction of the top between 4 and 5 percentage points, but the 
loss of deductions themselves would increase the effective 
marginal tax rate by about 4.5 percentage points, essentially 
leaving effective marginal rates unchanged.
    How do the primary provisions affecting housing, mortgage 
interest deductions, property tax deductions, and exclusions of 
capital gain fit into this framework? First, although their 
broad use and popularity may be political barriers to major 
revisions, many economists have criticized these provisions as 
distorting the allocation of resources, diverting capital from 
other uses, encouraging the overconsumption of housing, and 
treating renters differently from owner occupants. There may, 
however, be merits to owner-occupied housing, such as the 
neighborhood benefits that have already been mentioned.
    Perhaps more importantly, a home is an important asset in 
retirement. Since investment in a home is a form of automatic 
savings, accumulating equity as the mortgage is paid, that 
saving may be in part an increase rather than a substitute for 
other savings. If a goal of tax reform is to encourage saving, 
these subsidies may be justified.
    Finally, in terms of fairness, mortgage interest deductions 
increase fairness between homeowners who rely largely on 
mortgages and those who finance out of assets.
    There are some additional justifications for retaining the 
capital gains exclusion. Capital gains taxes on home sales 
discourage labor mobility by increasing the cost of relocating. 
They cause real lock-in effects, such as discouraging older 
individuals from scaling down their homes as their families 
become smaller or moving to rental housing, since taxpayers can 
avoid tax on the gain by holding their home until death. They 
impose taxes on certainly elderly individuals, who are forced 
to sell, for example, for health reasons, and not on others. 
And the lock-in effect, about which we know very little, may 
significantly reduce the potential revenue gain.
    Transition issues also arise for individuals who have 
recently acquired large mortgages, and there are also immediate 
concerns on the housing demand, because the economy and the 
housing market are still very fragile. And transition rules, as 
long as you know they are happening, might not do much on that 
demand, for preventing a reduction in that demand.
    Now, looking at distribution, these housing provisions are 
not that important relative to income for taxpayers facing the 
top marginal tax rates, and so they would do very little to 
permit those rate reductions. Also, high-income taxpayers could 
avoid the effects by paying off their mortgages.
    The same sort of marginal effects on effective tax rates 
and supply-side responses with the loss of deductions raising 
effective marginal tax rates and offsetting statutory rate 
reductions would also occur with these provisions, but they 
would take a little longer and, most importantly, they would be 
focused on the sort of middle-class or upper-middle-class 
taxpayers generally with incomes between $100,000 and $250,000. 
Thank you.
    [The prepared statement of Ms. Gravelle follows:]
    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
    
    Chairman CAMP. All right. Thank you very much, Ms. 
Gravelle.
    Mr. Calabria, you are recognized for 5 minutes.

  STATEMENT OF MARK A. CALABRIA, PH.D., DIRECTOR OF FINANCIAL 
       REGULATION STUDIES, CATO INSTITUTE, WASHINGTON, DC

    Mr. CALABRIA. Chairman Camp, Ranking Member Levin, other 
distinguished Members of the Committee, I thank you for the 
invitation to appear at today's hearing.
    Let me first say that I believe housing is a critical 
component of our economy. More importantly, I think we need to 
keep in mind that housing is one of the basic necessities of 
life. Without stable, decent, and affordable housing, many 
other goals in life become quite difficult, if not impossible 
to achieve.
    With that in mind, it is my opinion that our current Tax 
Code actually does little to help achieve these goals. I 
believe a Tax Code that would improve economic growth and 
housing affordability would ultimately be a Code with low, 
simple, flat rates, with few, if any, deductions. Accordingly, 
I would urge the Committee, as an ultimate objective, to 
entirely eliminate the mortgage interest deduction and the 
deduction for local property taxes. I would also encourage the 
Committee do so in a budget-neutral manner, lowering overall 
rates.
    As households have made significant investments and 
decisions based upon the current Tax Code, such a change 
should, of course, be phased in over a reasonable number of 
years. I would suggest no more than 7. I recognize that such a 
change immediately raises questions as to any adverse impact. I 
would be the first to agree that no policy is without both 
costs and benefits. There are no freebies. Before we can 
properly assess those costs and benefits, however, we must 
start from a position of understanding.
    As it relates to the mortgage interest deduction, we can 
think about, or at least I think about homeowners as broken 
down into roughly three near-equal-size groups. The first third 
is homeowners who have no mortgage at all. That is about a 
third of owners who own their homes free and clear, deriving no 
benefit from the mortgage interest deduction. I will note as an 
aside, prior to 1960, the majority of homeowners actually owned 
their homes free and clear without any mortgage at all. The 
second third have mortgages that are simply too small for these 
households to benefit from itemizing as opposed to taking the 
standard deduction. The last third are those who would 
potentially benefit from the mortgage interest deduction. These 
households also tend to be the most highly leveraged and the 
highest income households.
    The good news, in my opinion, from a transition is that 
those who currently benefit from the mortgage interest 
deduction are also those most likely to be homeowners with or 
without the mortgage interest deduction. I think the academic 
evidence is very clear that the mortgage interest deduction 
does almost nothing to increase home ownership rates. I have 
included in my written testimony a chart showing that changes 
over time in the value of the deduction have not been 
correlated with changes in the home ownership rate.
    We should also recognize that some portion of the subsidy 
behind the mortgage interest deduction is captured by lenders 
in the form of higher rates. This subsidy also differs 
dramatically across housing markets. In tighter markets, such 
as in San Francisco, the buyer gets almost no value from the 
subsidy, as it ends up being almost entirely captured by the 
seller. In looser markets there is very little price impact, as 
the buyer retains the majority of that subsidy.
    I would also argue that any price declines that result from 
the removal of the mortgage interest deduction would largely 
occur in markets where we would want housing prices to fall, in 
my opinion. Again, you look at San Francisco. The median house 
price is almost eight times median income. It is a simply 
unaffordable place to live by any stretch of the imagination.
    The Committee should also keep in mind that the value of 
the mortgage interest deduction increases with the level of 
interest rates outstanding in the economy. Quite simply, the 
higher our interest rates, the higher the value of the mortgage 
interest deduction. This also implies that the higher mortgage 
interest rates are the greater the impact of the mortgage 
interest deduction on house prices, to the extent that they are 
capitalized into house prices.
    Obviously the converse of that holds. The lower the rates 
are, the lower the value of the mortgage interest deduction and 
thus the lower the house price impact. So if we wish to 
minimize the impact of reducing or eliminating the mortgage 
interest deduction, then all else equal, we should do so at a 
time when interest rates are at their lowest. I would submit to 
you that it is pretty hard for me to believe that rates are 
getting lower than they are today. So if there is a time to 
eliminate or change the mortgage interest deduction, the 
optimal time would be now.
    We should not, of course, forget that rental properties 
enjoy many of the tax benefits that owner-occupied properties 
also get. Mortgage interest property taxes can all be expensed. 
The true advantage that the Tax Code offers to homeowners over 
renters is that rental income is taxed, whereas imputed rent 
that owners pay to themselves is not taxed. Economists have 
estimated that the value of this non-imputed taxation of 
owners' imputed rent is about twice the aggregate size of the 
mortgage interest deduction.
    While a handful of countries do tax imputed rent, I believe 
a much fairer and simpler system for achieving tenure 
neutrality in the Code would be to end the taxation of rental 
income. My back-of-the-envelope calculation is that such would 
score about $6 billion annually.
    Let me wrap up by emphasizing that extremely high levels of 
leverage on the part of households and financial institutions 
was a direct contributor to the recent financial crisis. As the 
mortgage interest deduction is less a subsidy for home 
ownership than a subsidy for home debt, its existence, while 
not a major driver of the crisis, was a contributor. Reducing 
household leverage would improve the stability of our financial 
system and our economy.
    Thank you, and I look forward to your questions.
    [The prepared statement of Mr. Calabria follows:]
    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
    
    Chairman CAMP. Thank you very much, Mr. Calabria.
    Mr. Swagel, you are recognized for 5 minutes.

  STATEMENT OF PHILLIP L. SWAGEL, PROFESSOR OF INTERNATIONAL 
   ECONOMIC POLICY, UNIVERSITY OF MARYLAND SCHOOL OF PUBLIC 
                    POLICY, COLLEGE PARK, MD

    Mr. SWAGEL. Thank you. Thank you, Chairman Camp, Ranking 
Member Levin, and the Members of the Committee for the 
opportunity to testify.
    In the immediate aftermath of the financial crisis, I think 
it was understandable for housing market participants and for 
the housing industry to urge that policymakers ``do no harm to 
housing'' or ``make no changes.'' I think that time has passed. 
Housing is in recovery and cannot be left on the sidelines of 
tax reform. Instead, housing must be part of a thoughtful tax 
reform that boosts growth, simplifies the tax system, and 
maintains progressivity. Even more, the stronger sustained rate 
of U.S. economic growth from reform will be an important long-
term positive for housing.
    So I would urge that changes to the tax treatment of 
housing be made as part of an overall pro-growth tax reform and 
not as an ad hoc revenue grab to support higher spending, as 
unfortunately is the case in the Administration's budget 
proposal.
    Other developments will affect housing at the same time as 
reform, including the normalization of interest rates by the 
Fed, perhaps progress on housing finance reform, and other 
things.
    On the other hand, affordability remains very high with low 
interest rates, and the housing sector is at the beginning of a 
time of recovery. So even if tax reform whittles away some of 
the benefits that lead to a diversion of resources from other 
forms of investment, the housing sector and the housing 
recovery will continue going forward.
    So tax reform should address the incentives in the Code 
that lead Americans to purchase larger homes with more debt 
than otherwise and that distort the allocation of resources. 
This distortion reduces U.S. productivity growth and thereby 
reduces the growth of wages and income.
    As others have said, the benefits of the tax subsidies for 
housing accrue disproportionately to high-income families. 
Three out of four dollars of the tax benefits for housing go to 
families with incomes above the definition of the middle class 
put forward by President Obama's chief economist.
    Housing plays an important role for American families, 
businesses, and the overall economy, and the Code reflects this 
important role. As discussed in my written testimony, reforms 
to the mortgage interest deduction can preserve the support for 
housing in the Code while boosting U.S. growth and improving 
measures of distribution.
    It is not very common in economics that policy changes can 
improve both efficiency and equity, and that is possible here, 
reflecting the considerable bias in the Tax Code. And as others 
have said, an appropriate transition period can be put in place 
to smooth the impact of tax reform on housing, but the key is 
really to focus the tax benefits more carefully.
    One measure of the distortion in the economy implied by the 
tax subsidies for housing can be seen in a calculation of the 
effective tax rate for investment in different types of 
activities. So in 2007 the Treasury Department calculated that 
the tax rate on an incremental dollar of investment in housing 
was 3.5 percent, where the tax rate on business investment, 
overall business investment, was 25.5 percent. And since 2007, 
taxes on business investment have gone up, with higher taxes on 
dividends, capital gains, and higher taxes on the flow-through 
income of businesses.
    So it is vital to support housing, but it is also important 
to understand the disparity that the Tax Code presents between 
investment in housing and investment in other forms of 
activity, including business investment.
    The tax system also provides support for affordable 
housing. I would like to mention that very briefly in 
concluding. A key question that I think is worth further 
examination is whether the benefits that the Tax Code has for 
affordable housing are well targeted. In other words, do the 
dollars actually reach the people who most need help with 
affordable housing or do the benefits instead go to other 
parties, such as real estate developers?
    In general, a sound principle is for any tax subsidies to 
target people rather than places, and this suggests a focus on 
demand-side tax subsidies for affordable housing, such as the 
Housing Choice Voucher, the so-called Section 8 program.
    In contrast, the Low Income Housing Tax Credit has the 
potential to boost construction of affordable housing units. I 
think it would be useful for Congress and for the Committee to 
mandate careful empirical analysis--data, not anecdotes--to 
assess whether this is the case. And the idea is for tax policy 
to ensure that taxpayer resources be used in the most effective 
way to support the vital goal of affordable housing. Thank you 
very much.
    [The prepared statement of Mr. Swagel follows:]
    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
    
    Chairman CAMP. Well, thank you very much, Mr. Swagel.
    Thank you all for your testimony. We are now going to move 
into the question-and-answer phase of the hearing, and each 
Member who seeks recognition will be given 5 minutes in which 
to ask questions and receive answers.
    Let me start, and I will start with you, Mr. Swagel. I just 
want to go over a point you made in your testimony. I mean, 
clearly, over the last 2\1/2\ years, this Committee has been 
engaged very heavily in tax reform. We have had over 20 
hearings. We are determined to fix a Tax Code that many of us 
view as broken and really presents too much of a burden on 
taxpayers, it is too costly.
    You mentioned a pro-growth tax reform model that could help 
bring about general economic growth and job creation. And if 
that is the case, would that help the housing sector?
    Mr. SWAGEL. Oh, I think it would. Even if some of the 
benefits, such as the mortgage interest deduction, are reduced, 
the overall effect in boosting economic growth from reducing 
the tax on saving and the tax on investment in the U.S. Tax 
Code would boost the overall economy, and this would flow back 
into housing. It is hard to say, you know, that tax reform will 
pay for itself in the form of stronger growth, but there will 
definitely be a strong offset.
    Chairman CAMP. Mr. Calabria, do you have any comment on 
that?
    Mr. CALABRIA. I would agree. I think over time, ultimately 
in the long run, what should and what does drive house prices 
are incomes. And certainly I think one of the mistakes we made 
in the financial crisis was to try to get people to stretch 
above and beyond their means. And so to me, a pro-growth Tax 
Code is going to be one that increases labor productivity, 
increases wages, increases incomes, and makes housing more 
affordable by making people wealthier, not making them more 
indebted.
    Chairman CAMP. There has been some testimony, Mr. Toder, 
particularly yours, on the importance of transition rules with 
regard to any tax changes, or, you know, for the tax benefit 
regarding housing. Can you kind of elaborate a little bit more 
on that in terms of why transition rules are important? And do 
you have any recommendations on specifics of how transition 
rules should work?
    Mr. TODER. Okay. I wish I had thought about that a little 
bit more before throwing it out there. But part of the reason I 
did make that comment, there are studies out there which show 
fairly substantial effects on house prices of, for example, 
removing the mortgage interest deduction.
    They may not be as serious as those studies show. Interest 
rates are very low today. There are other people moving into 
the market who are not affected by the mortgage interest 
deduction. So I think they may be exaggerated, but nonetheless, 
we have had a very fragile housing market, as you know, and big 
losses. That has affected the construction industry, it has 
affected employment. And I think at this time, with the 
recovery a little fragile, you have to be a little bit careful 
about taking away those props.
    So whether this happens through gradually phasing out 
elimination of the deduction or grandfathering it for existing 
owners, there are a lot of different ways of doing this.
    Chairman CAMP. Sure.
    Any thoughts on transition rules, Mr. Calabria or Mr. 
Swagel?
    Mr. SWAGEL. Sure. Transition rules are important, and one 
could imagine phasing in the reduction of the mortgage interest 
deduction. I wanted to mention, it is possible to go too far 
also. Imagine a transition rule that entirely excludes existing 
homes and says, you know, only new homes won't have the 
mortgage interest reduction. Well, that will reduce the supply 
of new homes and could actually give a benefit to old homes. So 
anyone with an existing home could be better off. So the 
transition rules are really important. It is just as important 
to get that balance so that everyone is going to have to 
contribute something in tax reform.
    Chairman CAMP. Sure. Mr. Calabria.
    Mr. CALABRIA. Certainly there is a tradeoff, in my mind, 
between a reasonable phase-in, which I think is important--as I 
mentioned in my testimony, people have made investments based 
on this--versus simplicity. So I would, maybe to parse out 
something that Phil said, I would have the phase-in targeted to 
the person and the mortgage rather than the house. We know, for 
instance, historically the median life of a mortgage is about 7 
years. So I think in this interest rate environment, it will 
probably be closer to 8 or 9, but having this, the mortgage you 
have today, or if you have it already on the books, remain 
deductible, you could have some sort of glide path where that 
diminishes over time, but with somewhat new mortgages coming on 
in the future.
    I will emphasize again the value of the deduction is 
related to the value of interest rates and the economy. And, 
again, they are not going to get any lower, they are only going 
to get higher. My point would be this will only get more 
difficult in the future, so doing it earlier rather than later.
    Chairman CAMP. All right.
    And, Mr. Fleming, any thoughts on this idea of pro-growth 
reform and sort of the idea of general economic growth and job 
creation, what that might mean in the housing sector?
    Mr. FLEMING. Yes. I agree with what has been said. You 
know, a better growing economy, particularly with broad-based 
income growth, is helpful to the housing market. That is how 
people buy homes. That is how house prices rise in the longer 
run.
    And this is a very sticky wicket in the sense of, with all 
the deductions and the transition rules, in that, for example, 
a lot of the studies we look at look at the user cost of 
comparing renting to owning. But a lot of people don't just 
consider user costs. It is not a purely financial decision to 
buy a home, right? I mean, much as we economists like to 
believe that we act individually, financially, rationally, I 
don't know that that is often the case, and that we don't have 
a lot of other driving forces. And that is really what is 
behind this.
    If you incorporate user cost, which is where the tax policy 
is interacting and adjusting user costs to the benefit of home 
owning over renting, it is influential in the decision of 
tenure choice. You know, the studies have shown empirically it 
is influential, but it is not the only influential thing. Other 
things just as important are your overall income level. That is 
where the economy would flow in. What your marital status is, 
what your family size is. There are many other factors, as we 
know.
    It also shows, and some of the best economic research I 
have seen are these models that sort of take those decisions 
into two parts, which is the choice to buy or rent, and then 
once you have made the choice to buy, then it is a question of 
how much. Now, it also shows that it influences the ``how 
much'' component.
    So the question, I think, always gets back to, what is our 
public policy goal? Is it simply to spur home ownership? Is it 
home ownership in combination with increased investment in 
housing, which is where it stands today? I mean, we need to 
start with what the public policy perspective and goal is in 
the very first place before we attempt to redesign and figure 
out how to do the transition.
    Chairman CAMP. Okay. Thank you.
    And I just want to note that in terms of tax expenditures, 
40 percent of the base broadening in the 1986 Act did not 
involve tax expenditures. So tax expenditures are not the only 
way of base broadening in order to lower rates as we go 
forward.
    So with that, I would recognize Mr. Levin.
    Mr. LEVIN. Thank you. Welcome. I am glad we are having this 
discussion.
    You know, I think everybody favors economic growth. I do 
think we need to look at prior periods of economic growth when 
there was a dramatic increase of home ownership in this country 
and to take a look at the role that the mortgage interest 
deduction played. My guess is, if you go into a middle-class 
area like I represent, more or less, more than less, I think 
you would have testimony from people who bought their homes in 
the 1950s, 1960s, and 1970s as to the importance of the 
mortgage interest deduction.
    And it is interesting, Mr. Calabria, I think you mentioned 
a third are without a mortgage. I think we need to know how 
many of the people in that third paid off their mortgage over 
the years, and not just say a third.
    I have this chart as to who uses the mortgage interest 
deduction. I think we need to take into account the President's 
proposal relating to a cap of 28 percent. It would mostly 
affect those with income over $200,000. And it is interesting, 
of those with income between $100,000 and $200,000, it appears 
about two-thirds itemize and use the mortgage interest 
deduction. That is 14 million of 22-plus million. So we are 
talking about a major policy impact. And for those with income 
between $75,000 and $100,000, of the 16.5 million, over 6 
million use the mortgage interest deduction.
    I think we need to be very careful. And when we talk that 
this is mostly a high-income deduction, that is sometimes said, 
it really challenges us to look at what we mean by high income, 
because I think people who are making between $50,000 and 
$200,000, most of them are comfortable, I don't think they 
would call themselves high-income wage earners.
    So I would like to ask, Ms. Gravelle, you mention in your 
testimony that as to tax expenditures and their elimination, 
the 
tradeoff ``may be more apparent than real when considering the 
supply-side effects, such as labor, supply and saving.'' If you 
could elaborate on what you mean by that.
    Ms. GRAVELLE. Well, basically, if I am going to earn an 
extra dollar and, say, I am paying 5 percent of that, say in 
State and local income taxes to take a simple example, and get 
a deduction for it, if I lose that deduction that is going to 
raise my effective marginal tax rate.
    Well, every tax expenditure, virtually, except those for 
very low-income people, has those relationships to income. So 
if I spend an additional dollar and some tax-favored spending 
is part of that dollar, taking that away is no different from 
raising the statutory rate. It varies across the income 
classes, but what it means is that if you are thinking about 
trading up most base broadening for rates, you are not going to 
change the effective tax rate that affects labor supply or 
savings or entrepreneurship or whatever you are looking for. It 
is just not there in the works.
    And if you do dynamic scoring based on statutory tax rates, 
you will greatly exaggerate, probably greatly exaggerate any 
growth effects. In fact, there might not be any growth effects, 
depending on what kind of subsidy you are talking about.
    Mr. LEVIN. Okay. My time is almost up. I just want to say, 
I think, Mr. Swagel, it is true that the tax rate on investment 
is higher than on home ownership. I just think we need to be 
careful when we make those comparisons to take into account 
what home ownership has meant in this country. And we need to 
take a look at other countries which have had high rates of 
home ownership to see what the structures are there which 
perhaps encouraged home ownership. I think we need to be really 
careful when we make comparisons of any kind on this.
    Chairman CAMP. All right. Mr. Johnson is recognized for 5 
minutes.
    Mr. JOHNSON. Thank you, Mr. Chairman. Thanks for holding 
this important hearing on tax reform and residential real 
estate. And also, Mr. Chairman, thank you for asking me to 
serve as Chair of the Real Estate Working Committee. I very 
much enjoyed working with the Vice Chair, the gentleman from 
New Jersey, Bill Pascrell, and we had our fill of meetings on 
real estate.
    So I don't know if you guys can tell us any more than we 
have been hearing over the past 4 weeks or not, but I met with 
local homebuilders in my district, we met with them up here in 
Washington, we met with the realtors in both places. And I was 
once a homebuilder, so I understand the important role housing 
plays in our economy. At the meeting, one of the things I heard 
was that it would be more difficult for folks, especially 
first-time home buyers, to get a mortgage if the mortgage 
interest deduction was significantly cut back or eliminated 
entirely.
    Mr. Calabria, as someone who knows a thing or two about 
housing and who supports getting rid of the mortgage interest 
deduction, I would like to hear from you whether you think 
there is any truth to what I heard from the homebuilders, in 
that it would be more difficult for folks to qualify for 
mortgages if the deduction was cut back in some way or 
eliminated.
    Mr. CALABRIA. I think it depends on what you assume about 
house prices. And, you know, I think you will hear on the 
second panel, you have heard here that if we get rid of it, 
house prices will come down. And so I want to go to the point 
that the Ranking Member raised, which is I as a homeowner, if 
the choice given to me was would I like to pay a little bit 
less for that house or would I like to have the mortgage 
interest deduction and those two cases leave me equal payments, 
I would rather pay less for the house, quite frankly.
    I think it is not going to be any harder, because prices 
will come down, which means people have to save less to buy 
that house. So, again, there are going to be price effects, but 
I think that is actually a plus, not a minus.
    Mr. JOHNSON. Well, as a builder, we never include that as 
part of our computation. You know, you build a house for X 
amount of dollars and you put the profit on there and you 
charge the people that price, and it doesn't make any 
difference what the deduction is.
    Mr. CALABRIA. And I would certainly agree. As a builder or 
realtor, you have to take the market as a given, you know, 
because you don't necessarily drive the market, but the overall 
interest deduction does drive the market to a degree.
    Mr. JOHNSON. Mr. Toder, your thoughts on that same 
question, please.
    Mr. TODER. Well, you know, from people I have talked to, 
and maybe someone else can contradict this, I am not aware of 
banks, and I have dealt with several lately, asking anybody 
what their tax situation is when they are applying for a loan. 
They want to know your wealth, your income, your assets, but 
whether you are benefitting and how much from the deduction is 
not something that ever gets on the form, so I am not quite 
sure how it----
    Mr. JOHNSON. No. They want to know if you can afford the 
payments.
    Mr. TODER. Yeah.
    Mr. JOHNSON. Okay. Thank you.
    Mr. Calabria, later on we will be hearing from Gary Thomas, 
the President of the National Association of Realtors. And in 
his testimony, he argues that the tax system supports home 
ownership by making it more affordable. So is Mr. Thomas wrong 
here, or do you think the mortgage interest deduction inflates 
home prices? You have said it does, I guess.
    Mr. CALABRIA. I think the mortgage interest deduction 
inflates home prices by a degree. I also think it is important 
to parse out, you know, the mortgage interest deduction is a 
subsidy for debt, not home ownership. We can come up with a 
variety of ways. I would argue if we want to subsidize home 
ownership, we should be subsidizing home equity. Give 
households something to pass on, not debt.
    So, again, part of my objective here is not to change 
effective tax rates or not to change home ownership rates, but 
to change the amount of leverage and indebtedness we have in 
the system so that households have real wealth in that house, 
not just a big mortgage.
    Mr. JOHNSON. So in other words, you believe repealing the 
mortgage interest deduction would reduce home prices. How much 
do you think it would reduce them?
    Mr. CALABRIA. Let me first say, it depends on the markets. 
I think if you looked at someplace like Houston, where it is 
incredibly easy to build, there will be zero price impact. You 
look at someplace like San Francisco, and I think prices will 
come down something like 10 percent. So it really depends on 
how tight the supply is in that market. You are not going to 
see a uniform impact.
    I would also add, it is my belief the prices will come down 
in markets that are, in my opinion, way overpriced as it is. 
So, again, there is not going to be an impact in most of Texas.
    Mr. JOHNSON. Yeah. I think I agree with you.
    Mr. Toder, do you care to comment on that?
    Mr. TODER. I agree. I think it is just very variable. I 
think probably there will be some impact immediately in all 
markets, because it is hard for housing to adjust immediately, 
but that will be very, very variable across markets.
    Chairman CAMP. All right. Thank you very much.
    Mr. Rangel is recognized.
    Mr. RANGEL. Thank you, Mr. Chairman, for calling these 
hearings.
    Ms. Gravelle, could you expand on the idea that if we 
reduce the top rate and broaden the base, that it could be a 
disadvantage to moderate and higher--it could be an advantage 
for the moderate--it could be an advantage for the higher 
income, but moderate and middle-income people could be 
adversely affected?
    Ms. GRAVELLE. Well, if you want to achieve some of the rate 
reductions at the top that have been talked about, like going 
to, say, 25 percent, it is very hard to see a way to do that 
through tax expenditures or even--there are not that many 
nontax expenditures you can think of for individuals, either.
    So if you lower those rates and then do tax reform, and it 
is revenue neutral, then you would have to raise the tax burden 
on the middle class or low-income people. You know, there are 
only so many pieces of this puzzle. So either you can't lower 
those top rates with base broadening or people at higher 
incomes get a reduction in their tax burden and somebody else 
has to pay for it.
    Mr. RANGEL. Well, the theory that most of us use is that 
there are some preferential treatments that are given to 
individuals and corporations that if they ever had a reason for 
being, it no longer exists, and that the system is unfair, and 
that by eliminating what some call loopholes or others call 
unnecessary incentives, that this would give us the funds to 
reduce the rates without having a severe impact on the 
incentives that we talk about here.
    So one person's loophole is another person's incentive, but 
basically speaking, you are saying that you could not reduce 
the top rates to 25 percent, even eliminating the so-called 
loopholes, that it would adversely affect the moderate and 
middle income because we will be taking away from them tax 
benefits that they now enjoy?
    Ms. GRAVELLE. If you are willing to raise the tax on 
capital gains to ordinary rates and change the scoring for 
that, that the Joint Tax Committee does, without big behavioral 
responses, if you are willing to tax capital gains at death, if 
you are willing to tax defined benefit pension plans and 
401(k)s, there are some things there. What I am saying is I 
think most of those things are things that the people are 
interested in trying to retain in a tax reform that will 
accommodate growth, they are not some of the things they want 
to do. So if you take those off the table you have very little 
left.
    Mr. RANGEL. So basically what you are saying is that, 
politically, we would not be closing the so-called loopholes in 
order to raise the type of revenue that would be necessary to 
lower the top rates.
    Ms. GRAVELLE. Unless you are willing to go after those 
kinds of provisions.
    Mr. RANGEL. It's just that, you know, every time we talk 
about closing loopholes we get support from the Republicans 
until we try to do it. Then they say we are raising taxes on 
those people that we thought was equity. And then we have some 
people out there saying that they don't want any more revenue 
because more revenue means tax increases.
    We have to find what you have said, which is clear, that if 
you are going to close loopholes or bring equity to the system, 
somebody is going to get hurt. You can call it just treatment 
under the Code or you can say they have to pay more taxes. But 
your statement is based more on the political will to do what 
we have to do than the fact that we can raise the money if we 
had the will to do it.
    Ms. GRAVELLE. Well, it is not just political will. It is 
whether you think there are merits. I think there are a lot of 
difficulties in taxing capital gains at death, for example, or 
imputing incomes from defined pension plans. So we laid out all 
of those. Some of it is practical. Some of it is provisions of 
merit. Some of it is political. But it all looks to us very 
difficult to come up with the base broadening that you would 
need, particularly at the top.
    Mr. RANGEL. Thank you.
    Chairman CAMP. Thank you, Mr. Rangel. I certainly 
appreciate your comments but I think we will let the Committee 
have a try on how difficult this will be.
    Mr. RANGEL. That is all right.
    Chairman CAMP. Mr. Tiberi is recognized for 5 minutes.
    Mr. TIBERI. Thank you, Mr. Chairman. Mr. Calabria and Mr. 
Swagel, I found your testimony fascinating. I didn't agree with 
it all, but found it fascinating. Mr. Calabria, I love your 
last name by the way. You make a great point that is not often 
made in your written testimony on page 3: It should be 
emphasized that the deductibility of mortgage interest and 
property taxes is not exclusively to homeowners, in that 
landlords can also expense these items as well as claim a 
depreciation allowance for rental properties.
    Here is the point. And I don't think you realize you made 
this point. If I own rental property and my taxes go up, I 
increase rents. If you take this away--not you, we--if we take 
this away from an owner of rental property, you don't think 
rents are going to go up? They are. I am not going to allow you 
to answer, because I have to tell you I own property and they 
are. They are going to go up. That wasn't a question. That 
wasn't a question.
    And so here is another point I wanted to make and then I 
will let you guys shout if we have any time left. Mr. Swagel, 
higher income households tend to purchase larger homes with 
greater home mortgage debt and thus receive larger tax 
subsidies. You forgot to mention the AMT. The more people, 
taxpayers, have deductions and credits, the more they have 
higher income, higher mortgage interest deduction, higher 
property taxes, higher deductions on their return, the more 
likely they are going to be subject to the AMT. And I am 
painfully aware of that.
    So the other point that you both made was with respect to 
higher income. The data that I have in front of me from Joint 
Tax from 2004 show that 75 percent of the mortgage interest 
deduction benefit was collected by those earning less than 
$200,000. And the majority of those earning less than $200,000 
made less than $100,000. And I would argue--I don't have the 
stats for this--the closer you are to $200,000, the more likely 
you are going to be subject to the 
AMT, which will, again, mean you are going to be paying more tax
es.
    My final point deals with theory versus reality. As 
somebody on the street who was a realtor, I will tell you my 
bias. I was a realtor. Never once did I have a client say to 
me, Pat, I want to buy this house because I can get a higher 
mortgage interest deduction or I want to buy this house because 
the property taxes are higher. Actually, people wanted to go 
where property taxes were lower. Even if they were actually 
itemizing their deductions, they didn't say, boy, I want to go 
pay more taxes so I can deduct more of my income. I have never 
seen that behavior as a realtor.
    One more point and then I would love to have maybe your 
thoughts, both of you, Mr. Swagel in particular, you mentioned 
the low-income housing tax credit. As a Republican I would 
argue if you look at all the housing policy that the Federal 
Government does, and unfortunately Mr. Camp doesn't have 
jurisdiction over all of it. We only have jurisdiction over 
some of it. Whether it is at HUD, whether it is Section 8 
housing--I'm very familiar with both programs--or whether it is 
the low-income housing tax credit, as someone who tilts to the 
right from your testimony, why wouldn't we be encouraging 
public-private sector support? Maybe the amount is wrong, maybe 
the subsidy is wrong, but isn't it a good thing to get the 
public and private sector working together, which is exactly 
what the low-income housing tax credit does? It gets the best 
of both worlds. It has the Federal Government involved. It has 
the private sector involved. It has nonprofits involved.
    In my community, I have to tell you, if you and I went to 
tour housing for low-income people in my community in central 
Ohio and you looked at HUD property and you looked at Section 8 
property and you looked at low-income housing tax credit 
property, there is no comparison in terms of what is the best 
managed, the best utilized, the best housing for low-income 
individuals.
    And I take issue with the fact that we don't have low-
income housing. I can give you a property in my district on 
Livingston Avenue that has homeless veterans transitioning in 
their lives in property. They went literally from the streets 
into low-income housing tax credit property into the workforce. 
It is a fabulous, fabulous property. Go ahead.
    Mr. SWAGEL. I would say the goals of both the mortgage 
interest deduction and the low-income housing tax credit are 
laudable and I fully support the goals. The question, as I have 
written in my testimony, is the targeting. And it is an open 
question in the economics literature for the LIHTC how 
effective it is. Do the benefits of this taxpayer support, to 
what extent do they result in new units?
    Mr. TIBERI. Help us improve it. Help us improve it.
    Mr. SWAGEL. That is exactly it.
    Chairman CAMP. The time has expired. Mr. McDermott is 
recognized.
    Mr. MCDERMOTT. Thank you, Mr. Chairman. Russell Long, the 
old Finance Chairman in the Senate, once said that tax policy 
is ``Don't tax you, don't tax me, tax the guy behind the 
tree.'' I appreciate you having this hearing because I think we 
need to wake up the people because they are the people behind 
the tree in this one.
    And Ms. Gravelle, Mr. Calabria and Mr. Toder concede that 
the elimination of the mortgage interest deduction would reduce 
housing prices. They seem to think it might be a good thing 
since it would lower cost presumably for new buyers.
    Now, we already heard that 70 percent of the people who get 
this deduction are making less than $200,000. And I want to 
know how such a policy would affect seniors or people who are 
soon to retire who may have a significant portion of their 
savings in their house. To see their house drop by 10 percent 
or whatever, we don't know, we are just guessing how much 
percentage. In Seattle they dropped about 30 percent in 2007. 
So we don't know what is going to happen.
    But we are setting in motion a policy to pay for a 
reduction in corporate taxes down to 25 percent by taking it 
away from homeowners and people who were told by their father, 
as everybody on this dais was and practically half the people 
in the audience, when you get a chance, buy a house. Everybody 
in this country was told that. And some make it and some don't. 
So what happens to those people?
    Ms. GRAVELLE. Well, in every transaction on the demand side 
there is somebody on the supply side and if we use housing that 
is the seller. Clearly, if house prices fall the people who are 
selling their houses are going to lose money from that. I would 
say, though, I am not convinced there is going to be a large 
effect, at least not in the long run. We are talking about 
permanent tax policy. Simply because in the long run the supply 
curve for housing is probably pretty flat, the only thing that 
would have an effect would be land. Maybe land would have an 
effect.
    But in the short term, the people who are within the few 
years while the market is adjusting, yes, it is going to be 
like a one-time--if you have a price fall it would also be 
partly a one-time hit to them as well as a hit to the demanders 
who are having a direct tax reduction.
    Mr. MCDERMOTT. Suppose this Committee decided that we would 
allow you to have a deduction for interest on any loan under 
$300,000. How would that affect the country? I mean, I look at 
the loan amounts State-by-State and all of the ones who are in 
the top 14, with the exception of North Dakota and Utah, are on 
the coast. They are either Hawaii, Washington, Oregon, 
California or you start down the east coast and you get all the 
way down to Virginia. So what would happen if we set a cap? 
Let's say we will allow you a deduction up to $300,000?
    Ms. GRAVELLE. Well, that is the proposal people are talking 
about now, lowering the cap. I mean, it just depends on where 
in the income distribution you want to constrain this benefit. 
So if you lower the cap to $300,000--mortgage interest you are 
talking about--then you are going to have a smaller part of the 
community of homeowners having a marginal deduction.
    One of the problems, though, with these caps on deductions 
is they kind of worsen the problem that I talked about. I mean, 
you are creating essentially a bigger inframarginal benefit. So 
you are going to have more marginal tax that is sort of raising 
effective tax rates at the margin to trade off against the 
rates. But, basically, that is distributional. Right now the 
limit is $1 million and you will reduce substantially the 
benefits of the upper-middle-income-class individuals. And you 
would retain benefits for say the $75,000, $100,000, those 
kinds of taxpayers.
    Mr. MCDERMOTT. Yes, go ahead.
    Mr. CALABRIA. I want to make two quick points which, as I 
suggest in my testimony, I think we can do in a way where the 
same households who would be losing the mortgage interest 
deduction also see a corresponding decline in their tax burden 
so that we can construct this in a way that those households 
are held harmless tax wise.
    And, second, let me say, you know, on average 
overwhelmingly homeowners are wealthier than renters. And so to 
me, I think if we made it easier for renters to buy at the 
expense of households, that reduces wealth inequality, which is 
something I think we are concerned about.
    Mr. MCDERMOTT. We are talking about simplifying the Code, 
aren't we? And you are talking about adding 53 more pages to 
talk about this tradeoff between--I don't see how you make it 
simpler for the average person. For instance, John and I both 
got extensions.
    Chairman CAMP. Thank you. Mr. Reichert is recognized.
    Mr. REICHERT. Thank you, Mr. Chairman. Thank you for being 
here with us today.
    All of us in this room, and across the country recognize 
how difficult it is going to be to accomplish tax reform. But 
the process that we have been going through over the last 
couple of years now has been one of the most open. And I am 
only--this is my ninth year in Congress. I had a career prior 
to arriving here. But in my tenure here this has been one of 
the most open and transparent processes that I have been 
engaged in and I think most Members of this panel will agree 
with that.
    As the Chairman mentioned, we have had over 20 hearings 
regarding tax reform, all aspects of tax reform. One hearing 
associated with the working group that I work on--that I co-
chair on tax exempt organizations--one hearing was 8 hours, 42 
witnesses just a month or so ago. We have had working groups 
with hearings and discussions, open to all the Members here on 
this panel and open to all of you and the public.
    We have had discussion papers issued for people to review, 
open and transparent and all recognizing that we need to do tax 
reform.
    And this political rhetoric from an old cop's perspective 
is really becoming tiring. What we need to do is work together 
for the American people to make sure that the tax law works for 
them, that we are not continually taking away from the American 
worker, from the hard working citizen every day. They need a 
simpler tax form. They need a fairer tax form. And I think, 
again, every Member of this panel would agree with that.
    So to throw political bombs every time we have one of these 
hearings is becoming pretty hard to stomach from my point of 
view.
    I know there are people listening today across this country 
who, when they see this on some sort of a rerun sometime this 
evening, are thinking, you know, I am a family and I am looking 
to buy a home. My first home. Or if I have now owned my home 
for a while and am a family that has been able to work up the 
ladder, the economic ladder, and now I want to buy a second 
home. Or later in life, now over 60 like I am, maybe I am 
thinking about buying or selling my home and how does that 
affect me as I exit the home market, the discussion we are 
having?
    So, for at least these three points, the first home buyer, 
the family looking to buy a second home, or we have someone who 
is nearing retirement and looking at maybe selling their home, 
can you tell me how the mortgage interest rate deductions 
affect all of the families that I have just mentioned in each 
situation? Mr. Swagel, would you care to comment, please?
    Mr. SWAGEL. Sure. I would focus on the first one that you 
mentioned, because I think it is critically important to 
support the goal of home ownership and getting people from 
rental to home ownership. And mortgage interest deduction 
helps, it is just the benefits of that are mainly to people who 
don't need the help. I mean, it is the structure of our Tax 
Code. Most first-time home buyers are not spending a million--
don't have a mortgage of a million dollars. We subsidize a 
million dollars, 1.1 including home equity. So the first-time 
home buyer gets help. Probably most of the benefits go to 
people who are not in that category.
    If we are exiting then, if we are someone who exits home 
ownership and goes into rental, they are losing the tax 
benefit. For many people home ownership as they age isn't the 
right thing. And if this were providing them an incentive, the 
tax system is biasing their choices. To me, that is the biggest 
problem. We don't want the tax system to tell people what to do 
or to bias them on what to do. And I think that is the case.
    Mr. REICHERT. If you have a senior, for example, my father-
in-law has just sold his home. His spouse, my mother-in-law, 
passed away 3 years ago. He sold his home and guess who he is 
moving in with. But he has been able to pay off his home. So we 
tax his income, income that he could use from that home to help 
subsidize his retirement, medical bills, et cetera, that he 
might have. That doesn't make sense to me that the government 
is going to take away from a prudent man who has worked hard 
his entire life who is 88 years old. We are now going to take 
away some of his ability to pay for his retirement. Does that 
make sense to you?
    Mr. SWAGEL. I actually support the exemption for capital 
gains, the capital gains exemption.
    Chairman CAMP. All right. We will have to leave it at that.
    Mr. Lewis is recognized.
    Mr. LEWIS. Thank you very much, Mr. Chairman. And thank you 
so much for holding this hearing. I want to thank all of the 
witnesses for being here.
    Ms. Gravelle, since the stock market crashed in 2008, my 
district in Metro Atlanta has been troubled with foreclosures. 
I want to go to what Dr. McDermott implied. Communities and 
families were turned upside down and there are still many of 
these families in the communities and neighborhoods that are 
troubled.
    In 1944, when I was only 4 years old, my father had saved 
$300. He bought a house, a home. He had been a share cropper. 
Bought a house and 110 acres of land. I know this is not 1944, 
but is it right, is it fair, would it be just for us to say to 
a working family, to a middle-class family that we are going to 
snatch the rug from under you?
    We have been told over and over again buy a piece of the 
rock. Own your little piece of land. Own a house. The Federal 
Government should be about helping, caring. Could you comment?
    Ms. GRAVELLE. Well, I think--first of all even though there 
is only about a third of people who use the mortgage interest 
deduction, two-thirds of people, families have their homes. 
And, as I said, I think one important issue to keep in mind is 
this is an asset for middle-class families. They have----
    Mr. LEWIS. It is a major investment for middle----
    Ms. GRAVELLE. If we look at the data we see one of the ways 
that people save is by acquiring a home. And whether they sell 
that home or whether they have a home that they don't have a 
mortgage on when they retire, either one of them helps in their 
retirement benefit.
    So I think that is something to take into account. A lot of 
economists are very critical of the mortgage interest deduction 
for a lot of the reasons I have heard here and I am certainly 
aware of those. But I do think that is an important issue. And, 
by the way, my daddy was a share cropper too, and I came from 
Georgia, so we have some things in common here.
    Mr. LEWIS. Thank you. Well, you understand.
    Ms. GRAVELLE. I understand poverty.
    Mr. LEWIS. Thank you very much. I yield back.
    Chairman CAMP. Thank you.
    Mr. Roskam is recognized.
    Mr. ROSKAM. Thank you, Mr. Chairman. I just want to thank 
the panel. I feel like Tevye here in Fiddler on the Roof. On 
the one hand and on the other hand. I could listen to you talk 
for quite a while because I am finding myself learning things 
and that is what hearings are for. So thank you for your 
testimony and the sincerity with which you are approaching 
this.
    Mr. Calabria, a question for you as it relates to 
transitions. Let's assume for the sake of argument that there 
is a sunset on the home interest deduction. How do you 
contemplate a good transition, a good set of transition rules, 
or how does that play into somebody that has operated on an 
assumption, that is a reasonable assumption, and that is hey, 
this thing is here to stay and they take on a 30-year 
obligation? What is the transition that is reasonable and fair 
and doesn't pull the rug out from underneath the taxpayer?
    Mr. CALABRIA. Let's start with the observation that it is a 
30-year obligation, but the median life of a mortgage has 
historically been about 7 years. And in this interest rate 
environment I think it will be closer to 8 or 9 because people 
are less likely to want to get a new mortgage with these low 
rates that they have today. With that said, the transition 
window doesn't need to be 30 years. I think 7 or 8 would be the 
outside transition window that I would have.
    But you certainly could say whether you have a mortgage 
today versus people getting new mortgages coming in, I do think 
there are ways to make people held harmless.
    I also would note for families under $100,000 in income, 
the average I believe they are getting is about $200 in value 
annually from the mortgage interest deduction. For these 
families you could certainly just increase the standard 
deduction by $200 or $300 and they are held harmless post tax 
wise.
    So part of this question is do you hold them harmless on 
their mortgage? Do you hold them harmless on their tax burden? 
And so I think we could actually do this simply. Because you 
could certainly do it through standard deductions. You could do 
it through other ways that are not all that complicated. Of 
course you can also do it in complicated ways.
    Again, I would not have a transition period that goes for 
more than 7 or 8 years tops. But I think you can front load 
that in 3 or 4 years and most of the benefits and most of the 
costs would be there. But, again, I want to emphasize I believe 
it should be done in a budget neutral way where you are leaving 
the same families more or less the same after tax. They are 
just not tied to their mortgage.
    Mr. ROSKAM. I understood everything you just said. What 
about the person, though, that isn't part of the average or 
isn't part of the mean, they are outlier and they tend to write 
their Members of Congress, and they say, look, you know I have 
a 30-year mortgage. So are they pressing their nose up against 
the glass looking in or do they get accommodated somehow?
    Mr. CALABRIA. Again, the question is whether you want to 
hold them harmless on the house, which, again, only matters in 
tight housing markets. In places like Houston there is not 
really going to be a long-run price impact. Are you going to 
hold them harmless after tax? Now, I think you could hold them 
harmless after tax by again looking at things like whether you 
want to give a special deduction for your homeowner. And if you 
want to subsidize ownership, you can give a deduction for a 
homeowner whether they have a mortgage or not.
    My primary point here today is that if we care about home 
ownership, we should not be tying it to a mortgage, we should 
be tying it to home ownership which, again, I am skeptical 
whether the benefits outweigh it but, again, that is what the 
discussion should be about, not about having a bigger mortgage.
    Mr. ROSKAM. The phrase that you used during your testimony 
or during one of the responses, you said give households 
something to pass on, not debt. What did you mean by that?
    Mr. CALABRIA. If I want to have a variety of ways to try to 
get people into home ownership, certainly some sort of matched 
down payment assistance could be a direction. If you want to 
help them try to build equity--I will use myself, I live in the 
District of Columbia so, unsurprisingly, I have a large 
mortgage. I think what bothers me is the fact that--and, again, 
I don't want to paint myself as representative, but I would 
like to pay more of it down. But the fact that I will be 
penalized by the Tax Code for reducing my own leverage strikes 
me as ridiculous. It is making me make bad decisions.
    Mr. ROSKAM. Thank you. I yield back.
    Chairman CAMP. Mr. Neal.
    Mr. NEAL. Thank you, Mr. Chairman. Thank you to the 
panelists. There are few items in economics that touch every 
aspect of economics like housing. Income elasticity, supply, 
demand, tax policy. And I associate myself with Mr. Tiberi and 
Mr. Lewis on this, because I think still trying to get people 
into home ownership is a desirable goal.
    My public life was in local government and trying to 
generate new units and trying to find a place where interest 
rates and price would get people into the market. We were able 
to come to one fast conclusion. Once people owned a home they 
really helped to transform the neighborhood. They made pretty 
good decisions every day. If you are working and you own a 
home, it is part of building a community.
    I think one of the dangers of the tax reform discussion we 
are having, and it is a long way off I think to conclusion, but 
certainly a compliment to the Chairman as well on 
conversational tone of these get-togethers we have had, because 
they really have been learning experiences. But I think we need 
to be mindful of what broadening the base could mean.
    Broadening the base really could mean that middle-income 
people are going to be paying more in an effort to cut that 
rate from 35 to, as the President has suggested, 28 and Members 
on the other side have suggested 25. But the homeowner 
deduction really does serve a very necessary purpose and that 
purpose is getting people who can do it--I think one of the 
outcomes of the financial crisis that we witnessed was--albeit 
a slow discovery, but renting is a good idea for some. But, 
nonetheless, still in an old city in New England home ownership 
is essential.
    I thought that some of the testimony, particularly from Ms. 
Gravelle, you suggested that identifying tax provisions that 
would allow significant reductions in the top rates while 
maintaining the current distribution of tax burdens, what do 
you mean by that exactly?
    Ms. GRAVELLE. Well, again, in our report we identified a 
handful of provisions that are significant at the top. That is 
capital gains, capital gains at death, dividends, pensions, and 
then the two itemized deductions really important for those 
folks, charitable contributions and State and local income tax 
deductions. But 70 percent of those provisions are related to 
savings incentives.
    So if you are reluctant to go after those savings 
incentives, and there are reasons you might want to be, that 
makes it very hard. If we eliminate all itemized deductions as 
we said, we have about 5 percentage points. So that is a long 
way from the distance that people were talking about for the 
top rate.
    Mr. NEAL. Well, I have an interest in savings here, how to 
generate greater savings, and as you have described it, maybe 
you could comment on this. I suspect the answer might be in 
some measure a bit illusive. But there are some who put the 
devil's advocate hat on that say that after you do home 
improvements and after you keep adding on an additional room or 
you keep exploring new ways to improve the property that in 
some measure it might not look quite as good or as appealing as 
it originally did as you relate it to the whole notion of 
savings. Could you speak to that?
    Ms. GRAVELLE. I'm sorry; could you clarify?
    Mr. NEAL. Well, there are those who argue from time to time 
that after one gets done improving a home over the course of a 
30-year mortgage and all the things you do, because as you 
improve the home property taxes go up and even the value of the 
home might not go up, given what has happened in the last 5 
years which remains fairly stable, there are those who say it 
is not quite as good a deal as it ordinarily would be. But is 
that a vagary of the marketplace or just a----
    Ms. GRAVELLE. Well, I think that is the marketplace. I 
mean, if you look at housing before the housing bubble burst, 
housing looked like a very, very good investment. At least my 
house was a good investment. It fell down a little bit. It is 
going to come back up. I mean, this is a blip in the market.
    So I think homes are not a bad investment. The only way in 
which they are kind of questionable is if you put too much of 
your money in a home you don't diversify your portfolio very 
much. But then that is savings that you wouldn't have had 
anyway and people do tend to be a little myopic about savings 
sometimes. They don't really think about the future as much as 
perhaps we economists say they should. If it is just extra 
saving, then that is all to the good for your ability in 
retirement to have a decent standard of living.
    Mr. NEAL. Mr. Calabria is pining to get an opportunity 
here.
    Mr. CALABRIA. I just wanted to make two quick points. 
Professor Schiller at Yale has estimated--put together a price 
series for the last 100 years and has found that the after-tax 
return of housing over the last 100 years has averaged 1 
percent annually. So I do think the last----
    Chairman CAMP. We are going to have to leave it right 
there. We will go to Mr. Buchanan.
    Mr. BUCHANAN. Thank you, Mr. Chairman. And I want to thank 
each of our witnesses for being here today. I am a Member from 
Florida and this recession has been brutal on homebuilders and 
jobs. Florida is growing at a thousand people a day, you know, 
over the last couple of decades or so. We are in a tendency now 
where we are starting to come back. A lot of our builders have 
been basically put out of business, but they are starting to 
come back, as well.
    But I will tell you this, what I have seen lately and 
really over the last 30 years, the interest deduction does make 
a difference. I see a lot of homes that are being built in our 
area, the ones that can afford to buy a second home or buy a 
home, a lot of them, 70 percent, are paying cash. But the other 
part of it in terms of southwest Florida, there are a lot of 
people who are buying homes for $200, $250, $280 thousand. That 
is where the marketplace is. I think of two or three of our 
largest homebuilders that have survived this and that is where 
their focus is.
    A lot of those are young families, first and second home 
buyers. A lot of them have student loans or they are people 
that are working, technicians in our area. They are making 
$50,000 a year. They are being squeezed in terms of higher 
health costs and everything else in their area. But the 
interest deduction to a lot of them is a difference of $200 or 
$300 when they look at the overall payment that they are going 
to get back or to have that break in terms of going forward.
    So I would just ask, Mr. Fleming, when you look at this, 
this hasn't just been a recession in Florida. I hate using this 
word, but it has been a depression. We are starting to get some 
momentum coming back, especially in terms of homes $250,000 and 
under. What impact will this have, do you think, on eliminating 
that deduction? I just see this having a huge impact on a lot 
of people in our area.
    Mr. FLEMING. Yes, it is true. You unfortunately are from 
one of the poster childs of everything that went wrong in the 
housing market over the last 5 years. And there is recovery 
there. In large part, actually, the housing recovery that you 
are seeing is being driven by what are typically abnormal 
forces in the housing market. Institutional investor activity, 
lots of cash buyers. These are not the normal things that drive 
prices up. It is typically growing incomes and first-time home 
buyers entering the market and things like that.
    It is hard to say, I guess. I was laughing with a colleague 
of mine this morning saying the only thing I can be absolutely 
sure about with the mortgage interest deduction is that given 
that it creates both the incentive to consume more homes and 
some level of increased home ownership in and of itself. But 
all of that urban sprawl and traffic that I had to drive 
through to get here this morning can be attributed in part to 
mortgage interest deduction. Of that I am sure.
    But in other terms I think we have to be very careful. The 
price responds to something like a change, any sudden change. 
My testimony kind of gets to the point that suppliers, sellers, 
and buyers immediately respond to temporary change or immediate 
shock. Right? And we saw it in the first-time home buyer tax 
credit, we saw it with the capital gains tax.
    So the idea of an immediate shock happening, yes. The 
magnitude, harder to tell. Most of the models that we look at, 
the econometric models that come up with estimates of the price 
changes, basically hold the supply side inelastically fixed. In 
other words, there is no supply response to the impact. So of 
course the price response is bigger. In the immediate term that 
is true. It takes on average 9 months to build a home. Right? 
But in the longer run, of course there is going to be some sort 
of supply response to it.
    So it really gets down to, yes, maybe there is an immediate 
shock but the overall longer-run benefit is not necessarily as 
strong as the estimates that are empirically derived show.
    Mr. BUCHANAN. Any of the other panelists, I would like to 
get your thoughts.
    Mr. CALABRIA. I will make a couple of quick--clearly in my 
proposal I want to hold those families harmless after tax. I 
want to emphasize that. Second, $180,000 and below, if that is 
your only deduction is the mortgage interest deduction, you are 
better off itemizing. And we see that. And, third, as I 
mentioned in my testimony, the value of the mortgage interest 
deduction fluctuates with interest rates and, interestingly 
enough, if you did a time series when you value the mortgage 
interest deduction at its highest it is actually when 
construction is at its lowest. So they are inversely related. I 
have seen very little, if any, evidence to suggest to me that 
we see extra construction because of the mortgage interest 
deduction. Ultimately construction is driven by population and 
household formation.
    Mr. BUCHANAN. The point I was trying to make, in the real 
world just looking on the ground there, there are a lot of 
families, whether they are 30, 35, two workers in the family, 
that deduction of $200 or $300 makes a difference per month 
because that is what they are going to see. And the second 
point is we are historically low in terms of our interest rates 
at 3 or 4 percent. If you go back over 30 years, I remember you 
could not get a mortgage rate under 10 percent, but normally 7 
or 8 percent. Again, that would even be a bigger issue for them 
going forward.
    Chairman CAMP. Mr. Pascrell is recognized.
    Mr. PASCRELL. Thank you, Mr. Chairman. As was mentioned 
previously by Chairman Johnson, we worked over the last several 
weeks having I think seven really concrete meetings with 
different groups and looking at the possibility, not only in 
residential but commercial real estate. And our objective, Mr. 
Chairman, was to see whether some sheltering of income, some 
incentives, or any of them, made sense in terms of economic 
strength and fairness. I think that was significant in every 
group that we talked with, and it was certainly an elevated 
discussion all the time and it was civil and thanks to Mr. 
Johnson I think we did a lot of work in a very short period of 
time.
    The Tax Code has many provisions that impact residential 
real estate. And some of them, including mortgage interest 
deduction and deduction for State and local property taxes, are 
among the largest expenditures.
    It is not a surprise that they would be looked at in a 
quest to eliminate expenditures to lower the rates. But I think 
we need to proceed with caution. And you heard that this 
morning from our great panelists here.
    These expenditures are large not by accident. They are 
large because they are well understood and utilized by the 
middle class. We can't simply do tax reform and we can't do tax 
reform simply for tax reform's sake. We want to come out of 
this. I mean, most of the pages that are written in the Code 
were not written by you, Mr. Chairman, or me. They were not 
written by average middle-class folks. Huge groups that could 
afford a lot of lawyers, wanted to hide certain parts of their 
income. They are not criminals to do that. But we are looking 
at what is fair and what is not fair. And I think both sides 
would agree to that simple statement.
    Ms. Gravelle, I have a question. In your testimony you made 
a point that the tax preferences for owner-occupied houses like 
the mortgage interest deduction and the deduction for State and 
local taxes, are not the tax preferences most significant to 
the top tax brackets. I think that is what you said. Am I 
correct?
    Ms. GRAVELLE. Yes. Yes, that is right.
    Mr. PASCRELL. I strongly believe that we need to do 
something about income inequality in this country. Now, 
according to a recent study by Samuel Saez of the University of 
California Berkeley, the top 1 percent of households captured 
121 percent of income gains between 2009 and back to 2001. The 
99 percent actually grew poorer. Between 1993 and 2011 the top 
1 percent income grew by 57.5 percent while income for the rest 
grew 5.8 percent.
    What is the percentage of taxpayers with incomes over $1 
million who take the mortgage interest deduction? Do you know 
that?
    Ms. GRAVELLE. I think it is a large percentage. But it is a 
small percentage of their income. High-income people have 
houses and sometimes they have mortgages, but I imagine Eric is 
pointing his finger here; he knows this answer better than I 
do.
    Mr. PASCRELL. Go ahead.
    Mr. TODER. I think about a third of the people with income 
over $1 million take the mortgage interest deduction. And many 
of them have already either paid down their mortgages or, 
actually, I should say benefited from it, because we assume 
that if you eliminated the mortgage interest deduction many of 
those people would just simply pay off their mortgages.
    Mr. PASCRELL. Does that hold also for State and local 
taxes?
    Mr. TODER. Almost all of them would be taking State and 
local tax deductions.
    Mr. PASCRELL. So pretty much the same; right?
    Mr. TODER. Right.
    Mr. PASCRELL. According to the Joint Committee on Taxation, 
75 percent--75 percent of the MID is claimed by taxpayers with 
incomes below $200,000. That is what Mr. Tiberi and Mr. Levin 
pointed out before. It is about the same for State and local 
taxes. And I agree and associate myself with the words of Mr. 
Levin and Mr. Tiberi. If we eliminate the deductions for 
mortgage interest and State and local taxes, how much would tax 
rates have to come down in order to ensure the middle class is 
going to be paying an overall lower effective rate?
    Chairman CAMP. If you could answer briefly because time has 
expired.
    Ms. GRAVELLE. Just from memory, I think it is somewhere--
that class of those deductions are about 10 percent of income. 
So you are talking about a 10 percent rate reduction.
    Chairman CAMP. Thank you.
    Ms. Jenkins is recognized.
    Ms. JENKINS. Thank you for being here. Thank you, Mr. 
Chairman.
    Mr. Toder, your testimony comes to the conclusion that the 
mortgage interest deduction does a poor job at promoting home 
ownership. It mentions studies that have compared home 
ownership rates in countries like Canada, the United Kingdom 
and Australia. Can you just elaborate for us on how the U.S. 
compares in terms of overall home ownership rates to those 
similar countries and what sort of policies those other 
countries employ to promote home ownership?
    Mr. TODER. I am not sure what all the policies are in terms 
of their financial market policies, but Canada, Australia and 
New Zealand have all eliminated the mortgage interest 
deduction, which they previously used to allow. The United 
Kingdom has been phasing it out over a long period of time. 
They were actually doing it through the banks, so you would get 
it at the basic rate. The people above the basic rate wouldn't 
benefit from it. But they gave the subsidy to the lender and 
that had the same effect, really had 
the same effect as the proposals I am talking about, of 
converting the deduction to a credit, which would give the same 
percentage subsidy to everybody. So that was the way they did 
it. But in all of those places the home ownership rate is at 
least as high as it is in the U.S.
    Ms. JENKINS. Okay. Speaking of that, you noted that recent 
major tax reform proposals, including Simpson-Bowles and the 
President's 2005 Tax Reform Advisory Panel and the Bipartisan 
Policy Center, have all recommended moving from an interest 
deduction to tax credits.
    The general consensus appears to be between 12 to 15 
percent credit and either refundable or nonrefundable. I 
believe that you worked with the Bipartisan Policy Center on 
developing their tax reform proposals. So could you just 
describe for us how the determination was made to arrive at 
that credit level, whether to make it refundable, and what sort 
of deliberations took place?
    Mr. TODER. Sure, I would be happy to. I was a consultant to 
them. I was not a decisionmaker but I was helping them with the 
analysis.
    Ms. JENKINS. Okay.
    Mr. TODER. They were trying to get a much broader tax 
reform as part of an overall package to reduce the deficit, so 
their tax reform was actually raising revenue a bit. They 
started out with the idea that they wanted to get rid of as 
many tax expenditures as possible but came to the conclusion 
that some of them had to be retained in some form, one of which 
was mortgage interest, another one was charitable.
    They also developed the very far-reaching idea that they 
would like to get many people out of having to file tax 
returns. So the way they went about that was they restructured 
all of the basic benefits. They eliminated the standard 
deduction, personal exemptions, and the earned income credit. 
They replaced them with a flat child credit and a flat earning 
subsidy.
    So they set it up so that if you were in the lowest tax 
bracket, and you didn't have a lot of capital gains, you didn't 
have to file a return. It would all come out through 
withholding. And so this kind of mortgage interest subsidy fit 
into that. It was a subsidy at the basic rate of 15 percent, 
which was the bottom rate in their proposal.
    Ms. JENKINS. Yes, Mr. Swagel.
    Mr. SWAGEL. I would just like to add to what Eric said, the 
comparison between a credit and a deduction is an important 
one. The deduction is valuable to people at the bottom, but it 
is really valuable to people at the top. Whereas the credit, of 
course, is the same amount for everyone, depending on whether 
it is refundable or not.
    So in the sense of moving from deduction to credit it 
probably better focuses the taxpayer resources on lower 
incomes. Because for the person starting out, Ms. Jenkins, a 
person buying a $250,000 house, they will get the same credit 
as someone using the full $1.1 million of deduction, whereas in 
the current system they don't.
    Ms. JENKINS. Thank you.
    Mr. JOHNSON [presiding]. Mr. Davis, you are recognized.
    Mr. DAVIS. Thank you, Mr. Chairman. I want to thank all the 
witnesses for coming. Ms. Gravelle, the National Housing Trust 
Fund was authorized in the Housing Economic Recovery Act 
of 2008 specifically to address the housing needs of extremely-
low-income households. The NHTF is a block grant to States 
that, once funded, can be used to produce, preserve, 
rehabilitate and operate rental homes for very-low-income 
households. At least 90 percent of the funds must be used for 
rental housing and at least 75 percent must benefit extremely-
low-income households.
    The NHTF is intended to be a permanent program with 
dedicated sources of funding, not subject to the annual 
appropriations process. The funds are to be distributed by a 
formula based on factors detailed in the statute with a $5 
billion investment. Michigan would receive $146.1 million. The 
NHTF was initially to be funded by contributions from the 
government-sponsored enterprises Fannie Mae and Freddie Mac; 
however, shortly after HERA was enacted the financial crisis 
hit and of course these agencies were taken over by a 
conservatorship and funding was suspended. And, of course, 
Congress has never actually put the money in in the first 
place.
    The National Low Income Housing Coalition has talked a 
great deal about assistance to renters, that these individuals 
need some kind of help and could benefit greatly from it. And 
there have even been some who have talked about a renter's tax 
credit. How do you respond to those kind of thoughts?
    Ms. GRAVELLE. Well, you could have a renter's tax credit 
for low-income people if you make it refundable. But it 
wouldn't work otherwise, because very low-income people don't 
generally pay taxes because of the earned income credit and 
other provisions. I mean, for getting money to low-income 
housing there are a lot of different routes. The low-income 
housing credit in the Tax Code is one method, but it has to 
pass through a lot of middle men on the way so a lot of folks 
think that grants would be better.
    The other thing you could do is give people vouchers for 
rental housing directly from the government. Or, as I said, you 
could do it through refundable tax credit. The problem is 
people who don't file taxes then would have to file. A lot of 
people do, if they 
are working, because of the earned income credit. But there is 
always--for this particular objective there are a lot of 
different ways to get there.
    And I would say--maybe Eric can tell me what he thinks--the 
consensus is that usually these things are better done through 
spending rather than routing them through the tax system.
    Mr. DAVIS. Are there any other thoughts or ways that we 
might want to look at or could look at to try to make sure that 
these individuals or this category of citizens actually get 
some benefit that might move them a little bit beyond where 
they are relative to decent housing?
    Ms. GRAVELLE. Low-income housing issues in general are not 
really something that I have studied a great deal. But I think 
there has been a concern about diversifying the neighborhoods 
so you don't have pockets of low-income people in the same 
place. Those are some of the issues I know that come up with 
public housing.
    But I think an economist might say the easiest way is to 
give people a voucher to help pay their rent. That might be the 
easiest and most straightforward way to do it.
    Mr. CALABRIA. I will just quickly mention, because I 
mentioned in my testimony, the real difference between owners 
and renters is that we don't tax imputed rent for owners. And I 
suggested in my testimony that we stop taxing rent and we could 
limit that to rents charged below a certain level that are 
affordable. And if the market is competitive in certain places 
that will get passed on to the renter.
    Mr. DAVIS. Thank you both very much. Thank you, Mr. 
Chairman. And I yield back.
    Mr. JOHNSON. Thank you. Mr. Paulsen, you are recognized.
    Mr. PAULSEN. Thank you, Mr. Chairman. I have actually found 
this testimony very enlightening. It is part of that whole 
process of really diving in deep as to what the Tax Code is 
really about, because it is deep. If you do make changes in one 
area, it impacts quite a few different areas in other sections 
of the Code.
    Again, this is not about doing tax reform for tax reform's 
sake. This is about finding real solutions for a broken Tax 
Code. Everyone acknowledges the Tax Code is broken and we need 
a Tax Code that helps America compete and win, that grows the 
economy, that grows jobs. And we need a Tax Code that is a lot 
simpler and fairer so that an average family can actually do 
their own taxes.
    I find it astonishing that still nine out of ten American 
families are either required to pay someone else to do their 
taxes or purchase some sort of commercial software in order to 
do those taxes. And that is just not a Tax Code that is 
designed for the average person obviously in terms of 
simplicity. That is a Tax Code that is designed for accountants 
and lawyers and others.
    There is a lot of inefficiency and it really is time for 
us--and we are doing the right thing in terms of having 20-plus 
hearings, laying the groundwork, moving forward with these 
working groups, to making sure it is not going to be a 
continuing process of just special interests and handouts and 
bailouts, but really getting into the details.
    But I want to dive a little bit more into the low-income 
tax credit. This is an area where I have spent some time with 
some folks in Minnesota. I have seen the homes that the low-
income tax credit has actually produced through rehabilitation 
and loans to individuals. I do hear from the providers all the 
time that this is a credit that is a very effective way of 
producing affordable housing and providing homes for those who 
need them.
    So knowing that is the case--and part of the problem in the 
past has been I wonder is this tax provision going to be 
extended, is it going to be extended once again? So there is no 
certainty, there is no predictability for building the housing. 
So that is one of the goals of tax reform, to make sure that we 
have predictability and certainty.
    But just to follow up, what would happen if that tax credit 
just went away? Would making that tax credit permanent improve 
results or whatever takes its place improve results? And is 
there a way we can actually improve that credit for better 
results? It has been a public-private partnership. Mr. Swagel, 
you talked a little bit about that in your testimony. I know 
this is a long section of the Tax Code. But can you just maybe 
elaborate a little bit more?
    Mr. SWAGEL. Sure. I think the permanence would be really 
important. It could get at this uncertainty. The other thing 
that would help is that the value of the tax credit varies with 
the economic cycle and the demand for it. And so there is a 
sense in which it is not clear that the Tax Code is the best 
way to do this. If we want more supply of affordable housing 
units, which I think as a Nation we do, it is probably better 
done as spending and not to run it through the Tax Code.
    The other thing that might be considered, and, again, it is 
not argument to say do less of it, it is really do it better. 
But I think my testimony questions its effectiveness. And 
really it is that, is it effective and what is the best way to 
make it effective? Because we want to do both supply and 
demand, not supply or demand. The vouchers will help on the 
demand side and I think the affordable housing tax credit, if 
there were a better way of doing it, could help on the supply 
side.
    Mr. PAULSEN. Mr. Calabria.
    Mr. CALABRIA. Honestly, I have been a little skeptical and 
certainly looked at the low-income tax credit over time. I 
certainly understand why users of a program think it is a great 
program. But to me the academic evidence suggests: (a) There is 
a tremendous amount of crowd-out and about half of the units 
would have gotten built otherwise; and (b) There is evidence to 
suggest that most of the subsidy ends up with developers, 
syndicators, and lawyers. And I have nothing against 
developers, syndicators, and lawyers, all good people, but they 
are not necessarily who I think we should prioritize 
subsidizing.
    And so I am skeptical of it as a delivery vehicle. My 
tendency--I really--I know that public-private always sounds 
like a good thing, but I remember for years telling what a 
great public-private partnership Fannie Mae was for the 
government and that didn't turn out so well.
    So I do think we need to rethink some of what that means. I 
think Phil alluded to this earlier. I think that we should 
directly subsidize the people that we want to directly 
subsidize. If we care about low-income households, let's 
subsidize low-income households. I am very skeptical of doing 
roundabout ways through intermediaries. If the problem is 
somebody is poor, let's make them not poor. That seems like a 
pretty straightforward way of doing it to me.
    Mr. SWAGEL. One other thought to add, what you heard from 
the constituents in Minnesota is on the upkeep. And that really 
is the case. That the tax credit subsidized units do have 
better upkeep and that eventually those units go back to a 
fully private model. And I think that is the challenge. How do 
we get that? How do we make sure that low-income subsidies are 
not just Section 8, not just for low-income people, but have 
the diversity and that incentive for better upkeep?
    Mr. CALABRIA. The geographic evidence suggests to me that 
tax credit properties do get built in areas that are already 
high concentrations of race and poverty. So I tend to be more 
preferential to vouchers because I think we want to be able to 
get people into good communities rather than continuing to 
build properties in neighborhoods that already have problems 
and high concentrations of poverty to begin with.
    Chairman CAMP [presiding]. Time has expired. Ms. Sanchez is 
recognized.
    Ms. SANCHEZ. Thank you, Mr. Chairman. And I want to thank 
all of our panelists for sharing their thoughts with us today.
    I represent a pretty working class district in southern 
California and my constituents work very hard, often long hours 
and multiple jobs in order to just save up the money to 
purchase their first home. So for me it is incredibly important 
to make sure that we don't make it more difficult for working 
people to achieve the American dream of owning their own home. 
And that is why I am a little bit skeptical of changes to the 
Tax Code that would have the effect of putting that goal for 
them out of reach.
    Just last month we did a housing event in one of the cities 
in my district, Pico Rivera, that was aimed at doing two 
things: Helping current homeowners keep their homes and 
educating potential first-time home buyers about the process of 
purchasing a home. And at that event for the first time in a 
long time we started to hear many positive signs about the 
local housing market improving and gaining strength.
    And that was in marked contrast to the past several years 
when housing or the fear people had about losing their housing 
was overwhelmingly the number one issue that constituents were 
calling into my office and asking for help on.
    So targeted provisions in our Tax Code, things like 
excluding the discharge of principal residence indebtedness 
from income, have helped turn that tide and have gotten the 
housing market back on the right track. With the turning of 
that tide I think come good paying jobs in both the 
construction and the housing industries, good paying jobs that 
help a new group of people in turn achieve their dream of home 
ownership.
    Some of the overarching themes in the tax reform 
discussions that we have had are a little bit concerning to me. 
My biggest concern is that we not pay for tax reform on the 
backs of working people. Broadening the base and lowering the 
rate sounds great, it is a great bumper sticker, it is a great 
slogan, but that can't come at the cost of working class 
families.
    We have heard from some of the panelists today that 
targeted housing provisions in our Code create economic and 
market distortion, but many tax expenditures are essential to 
maintaining parts of our market and economy that help create 
good paying jobs. Many provisions discussed today help serve 
that very purpose.
    So my first question, Ms. Gravelle, could you elaborate a 
little bit further on just how hard it will be to achieve the 
Majority's tax reform principle, this broadening the base and 
lowering the rate, especially with respect to those tax 
incentives that are net positive with respect to job creation?
    Ms. GRAVELLE. In our study, we took the top 20 tax 
expenditures, which account for 90 percent of the revenue, and 
we went through them one by one and said, okay, what are these, 
what are the merits of these, what are the objectives. And, 
again, a large fraction of those provisions relate to savings. 
Or just take something like capital gains. Even if you wanted 
to tax capital gains at ordinary rates, the scoring methodology 
would not give you revenue from capital gains.
    Some of them are very difficult technically. For example, 
even though a lot of people talk about taxing employee health 
benefits, it is actually very difficult to impute the value of 
that to people in many different circumstances. And that came 
up during health reform. That is very hard to do, and that is 
why they ended up with a very limited, sort of the Cadillac of 
tax provisions.
    Defined benefit pension plans. How do you impute income? Do 
we really want to tax Medicare recipients on the value of their 
Medicare benefits? What do we want to do? Do we want to leave 
the earned income credit in place? Do we want to disallow the 
taxation for catastrophic medical expenses?
    We went through each of those one by one, and when we 
finished examining them, we just concluded that, for a whole 
variety of reasons, the objectives, the technicalities, the 
merits in general, that it was just very hard to have a large 
base broadening. If you eliminated every tax expenditure, we 
found that you could get the top rate down to about 23 percent, 
but once you start cutting those out, it gets harder and harder 
to do that. And that CRS report is out there, you know, it is 
available for people to look at. It shows how careful we were 
going through each provision one by one.
    Ms. SANCHEZ. And each of those provisions you just 
discussed, I am assuming probably affect middle-income and low-
income people more than any other group.
    Ms. GRAVELLE. We look at some that affect middle-income and 
some high-income, but many of these provisions, like employee 
health insurance, really are a middle-income----
    Chairman CAMP. All right. Time has expired.
    Mr. Kelly is recognized.
    All right. Mr. Griffin is recognized.
    Mr. GRIFFIN. Thank you, Mr. Chairman. Thank you all for 
being here today. I appreciate it. This has been a very helpful 
hearing.
    And I want to echo some of the comments I have heard from 
some of my colleagues, in that we are taking a comprehensive 
look at the Tax Code because most folks agree that it is a mess 
and it is counterproductive. And if we are going to encourage 
economic growth and job creation, the Tax Code right now, in my 
view, is a barrier to that. That is why we are doing this. We 
are not doing it for the sake of it because we don't have 
anything else to do. We are doing it because it is helpful to 
this country to fix this Tax Code.
    You know, on the way back from Afghanistan about a year and 
a half ago, while the pilots were resting, we stopped in 
Estonia, and we met with the former Prime Minister, who is now 
the Defense Minister, and he was telling us about his tax 
system. They said they pay in Estonia, they pay their income 
tax online in about 15 minutes. The average Estonian takes 15 
minutes to pay their tax. Now, I am not promoting their 
particular way of taxation, but the point is that we can do 
much, much better. Whatever that looks like, we can do much, 
much better. And, you know, we certainly can do as well as the 
beautiful country of Estonia.
    And I would say that the best thing for working families, 
working families in Arkansas that I represent, or wherever, the 
best thing for them is a growing economy and remaining 
competitive internationally. So that is why we are doing this.
    To address the mortgage interest deduction, I would like to 
say that I think it has been well said by many others here 
today that you can talk about, you know, the high-income folks 
that take advantage of it or whatever, but at its core, this 
benefits middle-class, working Americans. A lot of people count 
on this provision, and I think the statistics show this, 
whether you are looking at the percentage that are under 
$200,000 in income or $100,000.
    But one thing that I wanted to explore a little bit, Mr. 
Calabria, if you could talk a little bit about your comment 
earlier where you said, I think it was you, you said that the 
mortgage interest deduction incents more higher debt, not 
equity, not ownership. And if you could talk a little bit about 
that and your proposal to address that.
    Mr. CALABRIA. Sure. Let me start off by saying, you know, 
my proposal, I want to try to keep those families held harmless 
after taxes, not see their tax increase, but what we were doing 
is allowing them to prioritize, because, you know, I think 
housing is important, but I think education is important, I 
think healthcare, I think food is important, but I don't think 
the direction to go is here in Washington where we decide what 
people should consume or where they put their marginal dollar. 
I think they are smart enough to figure that out for 
themselves, quite frankly.
    So the thing is to reduce these tax connections to various 
consumption items and let people make those decisions for 
themselves while keeping their taxes low. My point being, I 
think we can tie that in that way, leaving these families the 
same after tax, you know, in very much the same way.
    Mr. GRIFFIN. You would acknowledge, would you not, that 
some of the proposals for a credit instead of a deduction, if 
you left the tax rate the same, would really hit a lot of the 
folks that take advantage of the deduction, if you left the 
marginal rates the same.
    Mr. CALABRIA. It would. And so I do think----
    Mr. GRIFFIN. Because it would be far less than the 
deduction.
    Mr. CALABRIA. So one of the objectives should be to try to 
lower marginal rates, because ultimately at the end of the day 
what we should be trying to achieve is growing household income 
and reducing the taxation of income, because income is what 
makes everything else in the world possible. So, you know, you 
could have all the mortgage interest deduction you want in the 
world, if the family doesn't have the income to afford the 
house to begin with, it doesn't matter.
    So, again, growing income should be our primary objective 
here, in my opinion. And I think a flat low rate like they have 
in Estonia should actually be something that we try to achieve 
and we should try to reduce some of the complexity in the tax 
system while reducing the penalty to work.
    Mr. GRIFFIN. Is it fair to say that a lot of the reforms 
that you propose would depend upon that lower tax rate, it 
would not be to the Code as it currently is constituted?
    Chairman CAMP. And if you could answer briefly.
    Mr. CALABRIA. Yes or no, I think it is important to reduce 
leverage even if we don't reduce overall tax rates, but I do 
think reducing tax rates should be part of that.
    Chairman CAMP. All right.
    Mr. GRIFFIN. Thank you, Mr. Chairman.
    Chairman CAMP. Mr. Renacci is recognized.
    Mr. RENACCI. Thank you, Mr. Chairman. And I want to thank 
all the panel for being here today also.
    You know, it is interesting. Of course, a lot of the 
questions have already been answered, but in my past life, 
before I got here, I was a CPA, and I remember sitting down 
with many people who walked in, some people just with a W-2, 
who said, help me do my tax return. So, again, I am going to 
repeat, as many of my colleagues have said, we need to make 
sure we have a simpler tax return so people can just file their 
tax return and not be concerned when they just have that W-2.
    But it is interesting, when it comes to home ownership, I 
had many that would come in and say, I am buying a home, but 
they never really asked what the interest deduction would do 
for them, either. And the question I always asked them was, 
well, you know, you are going to buy a home, have you looked at 
whether the economic value of buying that home is worth it, if 
the interest deduction is even going to help you? Are you 
better off to rent? In today's day and age housing is not, you 
know, the old, I am going to buy a home and I will pay my 
mortgage down and housing prices are going to go up, I am going 
to have a nest egg at the end. I am not sure we are there 
today, when housing prices are not moving up as fast as they 
used to and at the same time the debt you are paying in some 
cases, because we already have the standard deduction of 
$6,500, is not even a deduction for you. So it is interesting 
how complicated the Tax Code can be. But what is more 
interesting is that many people, as I said, really don't even 
care about the interest.
    My dad bought his first house, God love him, 30-plus years 
ago for $11,000 and probably never cared one bit about the 
interest deduction, and sold it 30 years later for $6,000. So 
it wasn't an economic advantage to him to have that house. But 
my friend's daughter is acquiring a house. She just got out of 
college. And she is not looking at--you know, I said to him, 
``Has she looked at the interest deduction?'' And my friend 
said, ``No, she doesn't care, she just wants to own a home.''
    So it gets back to something you said, Mr. Calabria, which 
is interesting to me. You said that, and you didn't finish, but 
the average after-tax return is less than 1 percent on home 
ownership. Could you explain that, go into more detail?
    Mr. CALABRIA. Sure. Bob Shiller, a finance professor at 
Yale, has put together a price series from 1890 to today, you 
know, when you put inflation in there, and so his calculation 
is after inflation on an annual basis, housing returns about 1 
percent for the value of the house. Now, of course, the retort 
is that, well, it can be massively leveraged and therefore your 
return is on that leverage. But as we have learned repeatedly, 
this was not the first financial crisis we had, and sadly, I 
don't think it is going to be our last, that this massive 
leverage in the system repeatedly comes back and 
haunts you. Leverage maximizes gains, but it also maximizes loss
es.
    So my point here throughout the testimony is not--I think 
home ownership is a great thing, I think it is a good thing. I 
think households being massively leveraged is not a good thing 
and I don't think we need--I think we can achieve high home 
ownership without massive leverage on the part of households.
    Mr. RENACCI. Mr. Fleming.
    Ms. GRAVELLE. Could I just make a comment about----
    Mr. FLEMING. I will just say quickly, the idea of--and I 
think this is something that many forgot during the most recent 
crisis was you gain utility of shelter primarily from housing, 
not as a financial----
    Ms. GRAVELLE. Absolutely. That is what I was going to say. 
That is the return.
    Mr. FLEMING [continuing]. Not as a financial investment. 
And to your point, many people make the decision about their 
tenure choice of how to achieve that shelter not by looking at 
the financial model of user costs. I mean, if you ask them, 
well, what did you use, did you look at the user costs of 
renting versus buying, they give you a blank stare, right? So 
it is about your position with, are you getting married, are 
you having children, you know, all these household and 
demographic types of things that drive that decision, and in 
some cases on the margin, maybe the financial decision, maybe 
the financial decision of, oh, I can get that mortgage interest 
deduction and that helps me make on the margin that choice of 
becoming a first-time home buyer.
    But honestly, first-time home buyers, their bigger 
constraint is the downpayment; not making the payment when they 
are in there, but getting access to a downpayment.
    Mr. RENACCI. If there was an opportunity to build savings 
before you went into home ownership, and then use that savings 
to buy that home, that is something that we probably should 
look at, too.
    Mr. FLEMING. Right. That is the challenge. And you see the 
first-time home buyer tax credit most recently clearly drew in 
a lot of demand. People were able to overcome that building of 
downpayment problem to get at buying a home.
    Mr. RENACCI. Mr. Calabria, there was one other comment you 
made that I just want to understand. You said something about 
the renter, no tax for the--I am trying to figure that out.
    Mr. CALABRIA. Yeah. I know imputed rent is not necessarily 
a straightforward concept. So if you think about it, you know, 
you rent a unit, you are paying rent, the landlord is paying 
tax on that rent. And so the economists tend to think, well, if 
you bought a unit, you are renting it from yourself, but you 
are not paying tax, and so that makes the choice between you 
becoming a renter less attractive if you were an owner. Because 
remember, all the mortgage interest, all the property tax 
stuff, that is expensible for the landlord, too, so there is a 
quality there. And so the real impact, again, is, as I would 
suggest, if we stop taxing rent, we will level the playing 
field between renters and homeowners.
    Mr. RENACCI. All right.
    Chairman CAMP. Thank you.
    Mr. RENACCI. Thank you.
    Chairman CAMP. We have two people who are going to come 
question and then I am going to the second panel. So we will go 
to Mr. Blumenauer and then to Mr. Reed, and then we will go to 
the second panel.
    Mr. BLUMENAUER. Thank you, Mr. Chairman. And I appreciate 
the way the two panels have been structured to, I think, walk 
us through the big picture. It is actually one of those rare 
times when the written testimony is actually better on both 
panels, and we really appreciate that.
    I would like to just take a slight, it is not a digression, 
but take one aspect of this. I have spent a lot of time working 
with a number of the organizations that will be testifying 
dealing with trying to have a functional flood insurance 
program that adds stability to the market. We have also spent a 
lot of time working on disaster relief, prevention, recovery, 
which, because of what has happened with climate instability, 
these costs are skyrocketing for the Federal Government.
    I am interested in any observations that you might have, 
and I would look for some from the other panelists later, to 
the extent to which we are using the tax system to subsidize 
people living in places where it has repeatedly been shown that 
nature may not want them. We have legislation that prohibits 
Federal investment dating back to the Reagan era, the Coastal 
Barriers Protection Act, where we don't put infrastructure 
there, yet we allow mortgage interest deductions for second 
homes in places that have been wiped out and we are spending 
money recovering.
    Do you have any thoughts about whether, regardless of what 
we do with mortgage interest reduction and tax reform, we might 
do a deeper dive to limit the exposure to the taxpayer paying 
twice, once to subsidize people living in a place that they 
probably shouldn't be, and then repeatedly going back in, 
cleaning up, paying disaster payments, and then allowing 
continued subsidization of that development? Any thoughts?
    Mr. CALABRIA. I will just mention, I will preface with, 
while staff on Senate Banking, I worked on all of our flood 
insurance issues and I actually headed our Katrina response for 
the Committee as well. And so I would certainly agree that we 
subsidize a number of policies that, in my opinion, do 
tremendous harm to the environment. For instance, I believe 
Fish and Wildlife Services have concluded that the flood 
insurance program has adversely impacted salmon runs. So there 
is a variety of negative impacts for subsidizing development in 
very sensitive areas, and I certainly think we should 
reconsider those subsidies.
    And, of course, it is also important to keep in mind, you 
know, while climate has changed, to me it looks like the 
evidence suggests the biggest problem is less that the 
disasters have gotten worse, but that we have moved to the 
disasters in a very big way. And, of course, I do think our 
subsidies have been a very big part of that.
    Ms. GRAVELLE. If you are thinking about vacation homes on 
the coast and things like that, obviously one thing to consider 
would be to disallow some of these deductions for second homes. 
But aside from that, I mean, there is still, for wealthy people 
who are doing this, for high incomes, there is still the 
exclusion of imputed rent. Even if you don't have a mortgage 
interest deduction, if you don't have a mortgage, you still are 
not implicitly paying tax on that. And that is a trickier thing 
to try to attack.
    The other thing is, again, I just know a little bit about 
the whole flood issue, but I think most economists would say 
the fundamental problem here is not a proper market pricing of 
flood insurance. So if you have something that floods and you 
know you can expect it all the time, then the insurance should 
reflect the price of that, and then you leave, you know, the 
benefits for extraordinary, unusual calamities.
    Mr. SWAGEL. Right. I was just going to echo that. The flood 
insurance program has the unintended effect that you mentioned. 
And we see that in the State of Florida, which has almost 
driven private insurance out of the home sector.
    Mr. BLUMENAUER. Mr. Chairman, just one subset, and I will 
yield back my time in a moment. But it just seems to me that 
one of the things that ought to be examined, if you are going 
to be subsidizing second homes, for instance, with a mortgage 
interest deduction, at a minimum, the reduction for people that 
are in extreme--and it is not just flood. I mean, we have 
places in the flame zone. One in four homes in the flame zone 
is a second or third or fourth home, where we are paying huge 
sums of money in the west to try to protect them and then we go 
in afterwards.
    And I would think that this might be something that is 
worth looking at that wouldn't be wildly disruptive to a real 
estate market. It might actually help stabilize it, but it 
would prevent the taxpayers from paying two or three times in 
areas where the costs are going up exponentially.
    Chairman CAMP. All right.
    Mr. BLUMENAUER. Thank you, Mr. Chairman.
    Chairman CAMP. Thank you.
    And I think we are done with our questions. So I want to 
thank this panel of witnesses for their testimony. The 
Committee greatly appreciates your testimony and your 
perspectives. And I also want to ask that if there are any 
questions that you want to submit in writing, we can add those 
to the formal hearing record. So, again, thank you for being 
here.
    I would like to call our next panel of witnesses forward, 
please.
    Mr. LEVIN. Mr. Chairman.
    Chairman CAMP. Also, I would like to recognize Mr. Levin.
    Mr. LEVIN. I would also like to thank the panel.
    And as we are shifting here, there is a gentleman behind 
me, Mike Hauswirth, who has been a valuable member of our staff 
since February of 2011, and before that, he was on Joint Tax. 
Mike is going to be leaving us to undertake new adventures. And 
I would like all of us to join in thanking Mike for all of your 
service both on our tax staff, but also on Joint Tax.
    Chairman CAMP. Thank you. And if our second panel could 
come forward, please. I appreciate your patience this morning. 
I know many of you were in the room during all of the first 
panel.
    Now I would like to welcome our second panel, I know all of 
whom bring important perspectives on the residential real 
estate industry with them.
    And, again, thank you for your patience. I saw you sitting 
in the room during all the morning testimony.
    First, I would like to welcome Gary Thomas, President of 
the National Association of Realtors. Mr. Thomas has worked in 
realty for over 35 years.
    Second, we will hear from Robert Dietz, Assistant Vice 
President for Tax and Policy Issues at the National Association 
of Home Builders. Mr. Dietz formerly served as a revenue-
estimating economist for housing issues at the Joint Committee 
on Taxation.
    Third, we will hear from Thomas Moran, Chairman and 
Managing Partner of Moran & Company in Chicago, Illinois, also 
appearing on behalf of the National Multi Housing Council and 
the National Apartment Association. Mr. Moran has specialized 
in private housing development for over four decades.
    Finally, we will hear from Robert Moss, a Senior Vice 
President at Boston Capital in Boston, Massachusetts, also 
appearing on behalf of the Housing Advisory Group in Boston. 
Mr. Moss serves on the boards of at least five housing 
associations.
    Again, thank you all for being with us today. The Committee 
has received each of your written statements and they are part 
of the formal hearing record. Each of you will be recognized 
for 5 minutes for oral remarks.
    And, Mr. Thomas, we will begin with you. Welcome. And you 
are recognized for 5 minutes.

             STATEMENT OF GARY THOMAS, PRESIDENT, 
        NATIONAL ASSOCIATION OF REALTORS, WASHINGTON, DC

    Mr. THOMAS. Thank you. Chairman Camp, Ranking Member Levin, 
and Members of the Committee, thank you for this opportunity to 
testify on behalf of the 1 million members of the National 
Association of Realtors, who practice in all areas of 
residential and commercial real estate.
    My name is Gary Thomas and I serve as the 2013 President of 
the National Association of Realtors. And I, like most 
Americans, agree that a major goal of tax reform should be 
simplification. But simplification does not necessarily equal 
elimination. The Code currently contains simple, easy-to-
understand housing-related tax provisions, enjoyed by millions 
of Americans, that have helped facilitate home ownership, build 
wealth, and provide stability to families and communities.
    In case there is any doubt, Realtors support maintaining 
current law for residential real estate tax provisions. 
Specifically, we urge you to maintain the current deduction for 
home mortgage interest, the deduction for real property taxes 
paid, and the capital gains exclusion for proceeds from the 
sale of a principal residence.
    My written testimony details these and other provisions, 
but I would like to focus on the mortgage interest deduction. 
Let me first clarify who benefits from the MID. In 2010, 37 
million tax filers claimed the mortgage interest deduction. Of 
those filers, 63 percent earned less than $100,000 and 91 
percent earned less than $200,000. Roughly half of those 
claiming the MID were under the age of 45. Many of these filers 
also claimed dependents or credits for children. Moreover, 
homeowners pay between 80 and 90 percent of all Federal income 
tax.
    If you want to know the majority beneficiary of the MID, 
the answer is not the rich; rather, it is young middle-class 
families with children who already carry more than their fair 
share of the tax burden. If Congress were to eliminate the 
mortgage interest deduction, it could mean an average tax 
increase of over $2,500 per family.
    Realtors realize that most believe Congress would not 
attempt to completely eliminate the MID. We hope they are 
right. However, there have been several proposals to change the 
deduction or eliminate it for certain taxpayers. Let me briefly 
respond to three of the most frequently mentioned proposals.
    One proposal would eliminate the deduction for second 
homes. While critics portray second homeowners as millionaires 
with mansions by the ocean, this ignores the facts. NAR 
research shows that the median income of a second-home buyer 
last year was $92,000 and the home they purchased cost 
$150,000. NAR research further shows that second-home sales 
make up 10 percent of all home sales each year. And all but one 
State has at least one county where 10 percent or more of their 
real estate market is composed of second homes. The economic 
impact second homes have on these communities should not be 
ignored, either.
    Another proposal is to cut the amount of eligible mortgage 
debt that can be deducted in half. While $500,000 might buy the 
most expensive house in some of your districts, in my own 
market, in Southern California, it might buy a starter home. 
Homeowners in high-cost markets already pay a higher percentage 
of their income for housing than those in less expensive parts 
of the country. This proposal would make home ownership even 
more expensive in markets where affordability is already a 
problem.
    Finally, we have heard proposals to change the deduction to 
a tax credit. While this discussion of credits versus 
deductions may make for great debate, the bottom line for 
current homeowners is this: If you are in a tax bracket higher 
than the credit amount, a credit will cause your taxes to go up 
and the value of your home to go down.
    Housing has helped lead us out of four of the last six 
recessions, and it appears to be doing so again. Americans are 
regaining confidence in real estate. Demand is increasing, and 
so are home prices. The greatest hurdle to full recovery in 
housing is uncertainty here in Washington.
    The mortgage interest deduction, along with other tax 
provisions, makes sustainable home ownership more affordable 
for millions of middle-class families who are the backbone of 
America. Congress must remember this as it pursues tax reform, 
and first, do no harm. I look forward to answering your 
questions. Thank you very much.
    [The prepared statement of Mr. Thomas follows:]
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    Chairman CAMP. Well, thank you, Mr. Thomas.
    Mr. Dietz, you are recognized for 5 minutes.

STATEMENT OF ROBERT DIETZ, ASSISTANT VICE PRESIDENT FOR TAX AND 
     POLICY ISSUES, NATIONAL ASSOCIATION OF HOME BUILDERS, 
                         WASHINGTON, DC

    Mr. DIETZ. Thank you for the opportunity to testify today. 
My name is Robert Dietz, and I am an economist with the 
National Association of Home Builders. NAHB represents all 
sectors of residential real estate development, single family, 
multifamily, remodeling, and businesses connected with 
supplying and financing those activities.
    Homebuilding is an industry dominated by small businesses, 
so the idea of a simpler, less complex Tax Code has great 
appeal. At the same time, our industry remembers painful 
lessons from the 1986 Tax Reform Act when the commercial and 
multifamily sectors experienced a downturn due to unintended 
consequences. For this reason, we urge you to be cautious and 
thoughtful when it comes to housing and tax reform.
    We have seen over the last 5 years the influence housing 
can have. When housing fares well, it is positive for the 
economy. The year 2012 was a year of expansion off of great 
recession lows, but recent data, such as NAHB's measure of 
builder confidence, has suggested the recovery will have starts 
and stops. In particular, the share for some home buyers 
remains below historic norms.
    Given the state of the industry, I would like to highlight 
a few key tax issues. NAHB strongly supports the Low Income 
Housing Tax Credit. Created in the 1986 reform effort, it is 
the most effective tool for the creation of affordable rental 
housing. Utilizing a public-private partnership to attract 
investment, the tax credit has created over 2 million 
affordable rental units. The needs for such housing remain 
significant and we strongly urge the Committee to protect this 
program.
    Also, the completed contract rules in Section 460(e) are 
essential to homebuilders and offer a case in point about tax 
reform. Absent this fix to changes made in 1986, many builders 
would need to pay taxes on homes prior to sale.
    However, when it comes to housing, the spotlight typically 
falls on the mortgage interest deduction, or MID. A few 
thoughts. First, we frequently hear few homeowners benefit from 
the MID because itemization is required. In fact, most 
homeowners will claim it. In 2009, for example, 35 million 
taxpayers claimed the MID out of 50 million homeowners with a 
mortgage. This means, of homeowners with a mortgage, 70 percent 
claimed the MID in that year. And typically more than 80 
percent of mortgage interest paid by homeowners is reported as 
a deduction. Over the course of a homeowner's time of 
ownership, the majority will claim the MID for years at a time.
    It is also claimed that the MID encourages the purchase of 
a larger home. These claims ignore the role of family size. The 
data show that larger families see a larger benefit, which is 
intuitive with the notion that families with children require 
larger homes. Also, the cost of housing varies greatly across 
the Nation, so what may appear to be a large deduction may 
reflect a modest home.
    Moreover, the MID and the real estate tax deductions are 
two of the few elements in the Tax Code that account for 
differences in cost of living. Indeed, the real estate tax 
deduction is an important reminder that homeowners pay over 
$300 billion in property taxes each year. This fact is often 
ignored in Federal tax debates, because these taxes are 
collected by State and local governments.
    There is also a connection between the age of a homeowner 
and the resulting benefit of the MID. As a share of household 
income, the largest deductions are for those 35 and younger. 
This makes sense, because these are the homeowners that are 
paying more interest in the early years of a mortgage.
    Given this demographic connection, NAHB believes that any 
policy change that makes it harder to buy a home or that delays 
the purchase of a home will have a significant impact on the 
wealth accumulation and makeup of the middle class.
    Now, a few thoughts on the MID rule for second homes. While 
many think of expensive beach property, such homes are often 
owned free and clear or rented, which excludes them from the 
MID. In practice, the second home deduction is important for 
many who do not think of themselves as owning two homes. For 
example, the second home deduction facilitates moving when 
owning two homes during the tax year. The second home MID rules 
also permit existing homeowners to claim interest on a 
construction loan for a future home being built.
    Repeal of the second home MID rules would affect large 
sections of the country in nearly every State. There would be 
negative economic consequences in terms of lost home sales, 
home construction, and lost tax revenues.
    How housing is treated in any future tax reform will shape 
the economy going forward. This is particularly important now. 
Housing provides the momentum behind an economic recovery, 
because homebuilding and associated businesses employ such a 
wide range of workers. Housing could be a key engine of job 
growth that this country needs.
    As the Committee moves forward on tax reform, NAHB wants to 
be a constructive partner. Thank you, and I look forward to 
your questions.
    [The prepared statement of Mr. Dietz follows:]
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    Chairman CAMP. Thank you very much.
    Mr. Moran, you are recognized for 5 minutes.

 STATEMENT OF THOMAS F. MORAN, CHAIRMAN AND MANAGING PARTNER, 
 MORAN & COMPANY, CHICAGO, IL, ON BEHALF OF THE NATIONAL MULTI 
     HOUSING COUNCIL AND THE NATIONAL APARTMENT ASSOCIATION

    Mr. MORAN. Thank you. Chairman Camp and Ranking Member 
Levin, the National Multi Housing Council and the National 
Apartment Association would like to thank you for this 
opportunity to testify on the multifamily industry's priorities 
for tax reform.
    My name is Tom Moran. I am the Chairman of Moran & Company 
from Chicago. I have been in the multifamily business for 40 
years. My firm operates nationwide. We develop, own, manage, 
and sell apartments. I happen to also be a CPA and a lawyer, 
and I am acutely aware of the critical tax issues confronting 
our apartment industry.
    The apartment industry builds vibrant communities by 
offering housing choices. Currently, there are 19.3 million 
apartment units with 35 million residents, which contribute 
$1.1 trillion annually to the economy and helps support nearly 
26 million jobs. The demand for apartments continues to grow 
thanks to the changing demographic. Harvard University research 
shows that half of all the new households formed this decade 
could be renters, which is up to 7 million. Home ownership has 
declined from 69.2 percent to 65.5 percent in December of 2012. 
A 1 percent change in home ownership represents approximately 
1.1 million new apartment households.
    The demand for apartments is surging, but supply is not 
keeping up. We need to build at least an estimated 300,000 to 
400,000 units per year, yet last year we delivered only 158,000 
units.
    Like many small businesses, the apartment industry has a 
considerable stake in tax reform. We ask that tax reform take 
special care not to harm the thousands of existing real estate 
businesses which provide housing for 35 million residents.
    First, we believe that tax reform must be comprehensive and 
encompass both individual and corporate taxes, but done at the 
same time.
    Second, more than 75 percent of all real estate businesses 
are formed as partnerships or LLCs, which are flow-through 
entities where the owners and individuals are taxed 
individually each year at ordinary income tax rates except in 
the year of sale. These entities set forth the risk and 
obligations of the operating partner, the financial obligations 
of the investing partners. These documents are extensively 
negotiated and are an integral part of the real estate industry 
as well as other small businesses. Tax reform should not affect 
the way that business is transacted in the future, and the 
current regulations pertaining to capital debt and bases should 
not be changed.
    Third, the carried interest proposal as drafted should not 
apply to real estate since real estate developers and owners 
take substantial risks in developing and rehabbing real estate. 
They take development risks in buying the land, zoning the 
property, and guaranteeing the construction costs. They take 
financial risks in securing a construction loan with a 100 
percent construction guarantee and a 25 percent payment 
guarantee. They have investor risk. If you do not find an 
investor, you can lose your entire investment. If you secure an 
investor, he will receive a negotiated return and recoup his 
investment prior to any return on the carried interest.
    The current interest proposals do not have a current 
effective date. It applies to all buildings and partnerships 
retroactively. Thus, if you have owned a building for 30 years 
and have a substantial profit, primarily due to cost inflation, 
the carried interest proposal would be retroactively 
recharacterizing the capital gain to ordinary income. This 
retroactive recharacterization of ordinary income is most 
unfair and would cause transactional havoc in partnerships, 
where the general partners would be taxed at 40 percent and the 
limited partners at 20 percent. Real estate developers take the 
risk, create the jobs, and should be taxed at lower capital 
gain rates, the same as founder shares and other capital 
assets.
    Tax reform must retain 100 percent deduction for business 
interest. Real estate buildings are expensive and debt is a 
major portion of the capital stack. Thus, interest is an 
ordinary and necessary expense of doing business.
    Fourth, we must protect and make permanent the Low Income 
Housing Tax Credit, since Harvard is currently estimating that 
we have a shortage of at least 3 million affordable units.
    Fifth, tax reform should respect and not change the estate 
tax legislation enacted in January of this year.
    Finally, we strongly support extending and modifying the 
179 energy provisions by enabling more properties to qualify 
for the incentive.
    On behalf of the apartment industry and our 35 million 
residents, we thank you for the opportunity to testify today 
and we look forward to answering any questions you may have.
    [The prepared statement of Mr. Moran follows:]
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    Chairman CAMP. Well, thank you, Mr. Moran.
    Mr. Moss, you are recognized for 5 minutes.

    STATEMENT OF ROBERT MOSS, SENIOR VICE PRESIDENT, BOSTON 
  CAPITAL, BOSTON, MA, ON BEHALF OF THE HOUSING ADVISORY GROUP

    Mr. MOSS. Chairman Camp, Ranking Member Levin, Members of 
the Committee, thank you for inviting me to appear today to 
discuss the Low Income Housing Tax Credit. My name is Bob Moss 
and I am the Senior Vice President for Affordable Housing at 
Boston Capital, a real estate finance and investment firm that 
raises capital for investment in affordable rental housing. I 
am here today also on behalf of a broad coalition of over 450 
State, national and local affordable housing organizations, the 
Affordable Rental Housing Action Campaign.
    The housing credit is a bipartisan product of tax reform 
and a permanent feature of the Tax Code. Today the housing 
credit is generally recognized as the most successful housing 
production and preservation program. The housing credit is 
actually two programs. First, it is a capped tax credit program 
where States receive an annual amount of tax credits based on 
their population, and second, it is a bond credit program which 
combines fewer tax credits with tax-exempt multifamily bonds.
    One of the essential elements of the housing credit program 
is the role that State housing finance agencies play in 
administering the program. States annually prepare and publish 
qualified allocation plans that lay out State housing needs and 
priorities after soliciting public input through a transparent 
and open process.
    Our Nation is experiencing a crisis in affordable housing. 
This is not a new crisis, but it has grown worse in recent 
years. One quarter of all renters pay half or more of their 
income in rent. Nearly two-thirds of extremely-low-income 
household renters pay at least half of their income in rent. 
And the reason low-income households face such high rent 
burdens is the shortage of affordable housing. On average, 
State housing finance agencies receive applications annually 
for more than twice as much housing credit as they have 
available.
    Federal priorities have a major impact in how States run 
their housing credit program. And while the statute permits 
targeting to households with incomes up to 60 percent of area 
median income, according to a recent study by the Furman Center 
at New York University, the program in fact reaches much 
further down the income scale, where the need is greatest.
    Since the housing credit program was established in 1986, 
it has made possible the development of more than 2.5 million 
rental homes. Each year about 100,000 new rental homes are 
developed or preserved under the program. This program also 
accounts for 95,000 jobs annually. This produces almost $8 
billion of local income through wages for workers and profits 
for small businesses, and about $1 billion in taxes and other 
revenues for local governments.
    The housing credit serves the full spectrum of housing 
need, including housing for families, seniors, people with 
special needs, veterans, and the homeless, in all geographic 
areas. Many local governments have used the housing credit over 
the years to spark neighborhood revitalization and help restore 
blighted areas.
    There are several key elements of the program that have led 
to its success. First, State housing finance agencies 
administer the program. This ensures that properties are 
developed according to local housing needs. Second, the private 
sector provides market discipline. And, third, the housing 
credit program is well designed within the Internal Revenue 
Code. Tax credits are not earned until the development is 
completed, it is in operation and housing qualified residents. 
This means that real estate construction and other risks are 
borne by the private sector, not the Federal Government.
    This threat of recapture imposes a powerful discipline on 
the program that ensures the properties are properly 
underwritten at the outset and diligently managed throughout 
the compliance period. Housing would not be built or preserved 
but for the capital contributed because of the housing credit. 
It is a safety net program that requires continued Federal 
support.
    This Committee did great work in 1986 when it created the 
housing credit. You designed a critically important program to 
maximize its efficiency, ensure investment occurs where it is 
needed the most, and harness private sector business discipline 
to achieve an important public policy objective.
    I thank you for the opportunity to address you today. Thank 
you.
    [The prepared statement of Mr. Moss follows:]
    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
    
    Chairman CAMP. Well, thank you. Thank you all very much.
    Mr. Thomas, this is directed at you. What is the biggest 
hurdle for people when they are buying a home? Is it having 
enough for the downpayment, especially now that we moved away 
from the zero-down loans that really helped fuel the subprime 
mortgage crisis? Is it interest rates? Is it some other factor, 
in your opinion?
    Mr. THOMAS. Well, it depends on the time of which you are 
speaking. If you are speaking of today, it is probably 
downpayment, because leaders are requiring more downpayment on 
loans other than FHA or VA, and so you have a bigger hurdle 
with the downpayment.
    Chairman CAMP. All right.
    Mr. Dietz, any comment on that? Is that your thought as 
well?
    Mr. DIETZ. The downpayment is a challenge. Labor market 
stability, wage growth, as the previous panel mentioned. 
Appraisals are a serious challenge. You can qualify for a 
mortgage, but if the appraisal comes in and says the home is 
inconsistent with where the appraisal is, then the sale falls 
through. And that is a problem for building as well as for home 
buyers.
    Chairman CAMP. All right. Just to sort of educate me and 
the Committee about the actual real estate market, what 
percentage of the market is first-time home buyers?
    Mr. THOMAS. It is generally about a third. At the present 
time it may not be quite that high because there has been such 
an influx of investor buyers, and so it has forced a lot of the 
first-time home buyers out of the market, because they are 
having to compete for homes. It is very difficult. In my own 
area, we have a 1-month supply of homes, and so the first-time 
home buyer is really at a disadvantage.
    Chairman CAMP. Sure. And what percentage would be so-called 
second homes? And is that obviously in regions of the country--
--
    Mr. THOMAS. Sure.
    Chairman CAMP [continuing]. You know, second homes probably 
make up a larger portion of that.
    Mr. THOMAS. Like in yours.
    Chairman CAMP. Yes. Especially in the northern part.
    Mr. THOMAS. Correct.
    Chairman CAMP. Just in general, though, I mean.
    Mr. THOMAS. Typically it is about 10 percent.
    Chairman CAMP. All right. What percentage of that second-
home market is, as I think some of you said, and I think you 
said in your testimony, people that are, say, maybe moving and 
they have two homes or they are getting ready for retirement 
and they buy a second home 5 years before they are going to 
retire? What percentage of that second-home market is that sort 
of----
    Mr. THOMAS. Unfortunately, we don't have statistics based 
on exactly what that is, but we know that as people are moving 
across the country or even within a given area, that this is a 
factor. But there are a lot of people that do buy second homes 
in anticipation of retiring into them, so that is a big 
percentage.
    Chairman CAMP. That is what I was wondering about.
    Mr. THOMAS. Yeah.
    Chairman CAMP. And in terms of home values, how do home 
values break down nationwide? I mean, what are between, say, 
zero and 100, 100 to 200, 200 to 300? Do you have that, or if 
not, can you get that to me?
    Mr. THOMAS. I can get it to you.
    Chairman CAMP. All right.
    I wondered, Mr. Moss, if you just wanted to comment on the 
previous panel. There was a lot of testimony about the 
incentives in the Low Income Housing Tax Credit and maybe it 
should go more to the individual as opposed to the way it is 
structured now. I don't know if you had a chance to think about 
that and if you had any comment on that.
    Mr. MOSS. Well, in looking at----
    Chairman CAMP. You may want to hit your microphone.
    Mr. MOSS. Sorry.
    If you look at most of the tax credit properties right now, 
in terms of achieving deeper targeting, they do. If you look at 
the Furman Center study and the type of targeting that is going 
on across the country, most tax credit properties are not just 
set at 60 percent of area median income. They serve levels at 
40, at 30 percent of median income. So there is some targeting 
going on there that would not be achievable under any other 
program. And especially with the private capital coming in to 
leverage these properties, it is not achievable under any other 
type of spending program.
    Chairman CAMP. In terms of the supply of low-income 
housing, is it in a shortage all over the country or are there 
regions that that is less the case?
    Mr. MOSS. The universe of affordable housing, when you 
start to talk about all the population types, is dramatic. As I 
mentioned in my testimony, we are now doing a lot of housing 
for veterans, returning veterans. There is a shortage. There is 
a great shortage of affordable housing in the United States in 
all areas. The nice and the great part about the credit is it 
is flexible and it can serve to provide housing for a lot of 
different housing types.
    Chairman CAMP. I guess I didn't ask that the right way. Are 
there areas of the country where the need is greater than 
others?
    Mr. MOSS. Certainly in higher population areas where there 
is more employment, there is probably more of a need. But also 
you have to remember that the bond program serves as a useful 
tool in those areas as well, not just the capped credit. And 
you are going to see that there is, if you look at the credits 
across the country with the per capita allocation formula, 
there is very little that spills over into the national pool 
that is unused, if any at all.
    Chairman CAMP. Mr. Thomas, what is your view on the 28 
percent cap in the President's budget?
    Mr. THOMAS. We don't support that. We think that is going 
to raise the rate for many people as to what they actually pay. 
So it has generally a detrimental effect.
    Chairman CAMP. All right.
    Mr. Dietz, do the Home Builders have a position on that?
    Mr. DIETZ. We are opposed to the 28 percent cap, too. And 
just to add an item, you know, something you don't see 
discussed a lot is that the proposal has grown over time as it 
has appeared in the President's budget proposals year by year. 
It now includes the Section 199 deduction, which would affect a 
lot of pass-through businesses, other exclusions. So that is an 
issue.
    Chairman CAMP. All right. Thank you.
    Mr. Levin is recognized.
    Mr. LEVIN. Welcome. You know, I think it is so important 
for us to dig out the facts, and I think what you have 
testified to helps us.
    I am not in favor of the status quo. I am also not in favor 
of changes that don't take into account the realities. For 
example, second homes, Mr. Chairman, I think you and I might 
agree, I-75 people come up your way on Fridays, and I try to 
move up I-75 in the suburban area. And when you take into 
account who is traveling up I-75 from Detroit and suburban 
Detroit up north, my guess is I think a lot of them are going 
to small second homes. And I think we simply need to be careful 
about our proposals.
    I also think, though, that we need to make sure that we are 
not opposed to everything. The 28 percent proposal of the 
President relates to some of the facts that came out earlier, 
and that is, who is benefiting, who is taking advantage of 
accessing the deduction. And in terms of numbers, the largest 
numbers by far are people under $200,000. It is also true that 
proportionately a very substantial amount goes to people in 
higher income brackets. And so I think we just need to take a 
hard look at that.
    Also, I think we would welcome you, if you don't have time 
through my questions, to take a look at the testimony of others 
before you, because, for example--by the way, Mr. Moran, I am 
not going to ask you questions about carried interest, because 
it doesn't really relate directly to this hearing. The carried 
interest issue covers more than real estate. So let's have that 
discussion some other time. Okay? We have been working hard on 
it and want your views. So many people take risk of all kinds, 
and they pay ordinary income tax on the benefits. Sometimes 
they don't receive any benefits from the risky economic effort.
    But I think it would be useful if you would take a look at 
the testimony that came before. And it was really striking, Mr. 
Toder, if I pronounced his name correctly, on page 7 has this 
paragraph: ``Some empirical research and observations confirmed 
this lack of a relationship between the MID and home ownership 
rights.''
    I think you need to look at testimony like this and give us 
further indications as to the relationship. For example, I 
think maybe it was you, Mr. Renacci, I am not sure, who said 
that when people buy a house they don't look at what their 
mortgage payment will be in terms of taxation. I find that 
somewhat hard to understand. I would think most people who are 
going to itemize if they buy a house would take note of what 
their monthly payment really would be on their mortgage. I 
think all of us do that all the time who have mortgages.
    So I think it would be useful for you to take a look at the 
testimony that came earlier--and thank you for your patience--
and give us your views on that.
    And the same on low-income housing, because while the 
testimony has been basically positive, I am afraid that there 
may be suggestions that we would significantly change that. And 
I am not in favor of the status quo, but I think going after 
these important policies, it is not a loophole, the Low Income 
Housing Tax Credit, it is a policy adopted by this country on a 
bipartisan basis, and I think we better be careful before we 
significantly tamper with it.
    My time is up. But give us your further ideas. Go back over 
the testimony that we heard earlier and give us any comments, 
if you would.
    Chairman CAMP. All right. Thank you.
    Mr. Johnson is recognized.
    Mr. JOHNSON. Thank you, Mr. Chairman.
    I would like to start with Mr. Thomas and Mr. Dietz, if you 
don't mind. On July the 11th, the Joint Committee on Taxation 
issued a report on the tax treatment of household debt, and in 
that report there is a chart which shows a surge in home 
mortgage debt from around 2002 through 2007. I asked them about 
that at a hearing we had back in July a couple years ago, and I 
wanted to share with you what Joint Tax had to say in a 
followup letter addressed to me and get your reaction.
    According to Joint Tax, ``Given that the home mortgage 
interest deduction has become less valuable over time, the 
deduction does not appear to explain the increase in home 
mortgage debt from 2002 to 2007.'' I would like to know your 
thoughts about this. First, Mr. Thomas.
    Mr. THOMAS. Well, I am not sure there is a correlation 
there. I think that the basics of having the mortgage interest 
deduction allows people to take that deduction and it allows 
for people to buy a home, especially a first-time home.
    You know, the thing that most people don't understand is 
that you can't take a snapshot at any one given time and get a 
clean picture of the people that are taking advantage of the 
mortgage interest deduction. It is really more like a movie, 
because the majority that take advantage of the deduction are 
younger and they are building their families and they are 
starting out, so that a greater portion of their income goes 
toward the debt of a home. And the mortgage interest deduction 
is very important to them, because it allows them to buy the 
size home they need in the community they are in. And that is 
all factored in when they apply for a loan, because the lender 
will look at what the mortgage deduction is going to do for 
them, and that allows them to purchase as much as they can.
    Over time, as they pay the mortgage down, the interest 
deduction is less meaningful, or if they pay their home off, or 
if they decide in later years to downsize. So all of those 
factors have to be taken into consideration.
    A lot of what we saw in the buildup during that period of 
time was really due to the price of housing. It had nothing to 
do with what the mortgage interest deduction did to it. It was 
really in the pricing of homes.
    Mr. JOHNSON. Mr. Dietz.
    Mr. DIETZ. I agree with the Joint Tax conclusion. When you 
look at the run-up in debt, the run-up in housing earlier in 
the decade, it was a lot of speculative bubbles, flippers and 
such. The way that the mortgage interest deduction's benefits 
accrue are, as he mentioned, sort of life cycle, and so they 
are over a number of years. The MID is not going to fuel a 
speculative bubble.
    And if you want a cross-country comparison, an experiment, 
so to speak, you can look at when we had housing bubbles in a 
number of countries around the world. They obviously don't have 
the same tax laws that we do, so, you know, it is hard to make 
a connection between the two, so I think Joint Tax is correct.
    Mr. JOHNSON. Well, I thank you for that.
    Mr. Thomas, and also Mr. Dietz, I wanted to get your 
reaction to some points made by a couple of the witnesses on 
the first panel. Two of them, Eric Toder from the Tax Policy 
Center and Mark Calabria from Cato, both argue the mortgage 
interest deduction has really no effect on home ownership. I 
would like to know your thoughts on that.
    Mr. THOMAS. Well, I would greatly disagree with that. I 
think that it does affect home ownership. If you look at Great 
Britain, which is just in the process of reducing the mortgage 
interest deduction, the average homeowner entry level into home 
ownership is now advanced by 7 to 8 years, so it means that 
they are delaying home ownership by 7 to 8 years. A lot of that 
is due to the fact that they can't deduct their mortgage 
interest anymore.
    We think we would have the same problem. So we think that 
there is quite a correlation there.
    Mr. JOHNSON. It makes it cost more to get in it, doesn't 
it?
    Mr. THOMAS. Absolutely.
    Mr. JOHNSON. Yeah.
    Mr. DIETZ. I agree. I think it is not only an impact on the 
home ownership rate, the number of home-owning households in 
the country, but the timing of when they become homeowners. And 
that 7 years, using the United Kingdom as a good example, those 
are big years in terms of family events, household formations, 
marriage, children, and most importantly wealth accumulation 
over a long period of time, because home ownership is a vehicle 
for accumulating family wealth.
    Mr. JOHNSON. You know, the Tax Policy Center also argues 
that the mortgage interest deduction encourages upper-middle-
class households to buy larger and more expensive homes. Cato 
makes a similar argument, in that the benefits of deductions 
are highly concentrated among both the highest income and 
mostly leveraged household. I would like your thoughts on that.
    Chairman CAMP. Yeah. Just briefly, please.
    Mr. THOMAS. Well, again, if you look at the statistics in 
our written testimony, that is contrary to what we have, which 
is that the vast majority of the benefit goes to people that 
are under $200,000 in income, and that a high percentage goes 
to those earning under $100,000.
    Chairman CAMP. Thank you. I do think we have to be careful 
in our comparisons to England, because they have large chunks 
of their country where you cannot get fee simple, you can only 
get a long-term lease, and that is a very different sort of 
model than we have in the United States.
    Mr. Rangel is recognized.
    Mr. RANGEL. Thank you so much, again, for your patience and 
for sharing your views with us.
    I was intrigued by Congressman Johnson's question as 
relates to the connection between mortgage interest deduction 
and purchases. About 10 years ago, or whatever time it was, in 
Miami, Florida, and throughout Florida, there seemed to be an 
overdevelopment of luxury condos, and there was the worry that 
wealthy people in New York could get a condo at a reasonable 
price without any downpayment based on the tremendous mortgage 
deduction that they would enjoy and the fact that there was 
continuous rapid appreciation of the property.
    Does that concept make any sense, that they wouldn't need a 
downpayment, just go down and buy a million-dollar condo based 
on that concept, appreciation and deductibility?
    Mr. THOMAS. Well, I think a lot of them did it because of 
their anticipation of appreciation. However, that makes no 
economic sense. No, it never did. And the type of lending that 
was allowed at that time, we don't want to see that again. So, 
you know, those were not good elements that went into buying a 
property. Those were not wise investments, obviously.
    Mr. RANGEL. Yeah, but I think if they still own the 
property and it did appreciate, I doubt whether they didn't pay 
any downpayment, but, you know, these wealthy people get 
together and share with each other the great economic ventures 
that they have had. And I am asking, is it possible that this 
could have happened, no matter what it looked like, that 
wealthy people could acquire property without any downpayment 
just based on appreciation and the fact that the tremendous 
monthly payments were--the interest was deductible and most of 
the early payments are interest and not principle?
    Mr. THOMAS. The majority of them are interest in the early 
months of----
    Mr. RANGEL. Yeah.
    Mr. THOMAS [continuing]. Early years of a mortgage.
    Mr. RANGEL. Yeah.
    Mr. THOMAS. Absolutely.
    Mr. RANGEL. And so isn't it logical that those who did it, 
whether it is bad economics or not, if they still have those 
places, notwithstanding the fact that they have leveled off, 
that at that time it seemed like a good deal and it was?
    Mr. THOMAS. Well, at the time they purchased it, I am sure 
they thought it was a good deal.
    Mr. RANGEL. No, no. I didn't ask what they thought. They 
did it. But I don't know what happened to them since then.
    Mr. THOMAS. Well, a lot of those properties dropped in 
value dramatically.
    Mr. RANGEL. Okay. Let me get to the question of carried 
interest. I assume because you get a favorable and much lower 
rate with capital gains, that all of you would support it. I am 
trying to figure out why. What work would you do that would be 
different from anybody else that is not investing in the 
project so that their income would be an investment on capital, 
and therefore they gain, where other people, especially in the 
venture capital area, who do the same type of work, get taxed 
at a much higher rate because it is ordinary income?
    So with the real estate, recognizing that you take a risk, 
it is my understanding that anyone who opens a business or 
takes a position hoping that the business would increase is 
taking a risk. But what makes the real estate industry 
different so that their profits should be treated differently 
than someone that is being taxed at an ordinary income rate? 
Mr. Thomas.
    Mr. MORAN. Well, I am not sure they should be treated 
differently than somebody else taking the same type of risk, 
but the risk that we take in the real estate industry in 
building buildings, as you know, you are buying land and you 
are taking the risk on the land, you have to get it zoned, you 
are getting it zoned, you have to go hire architects, you hire 
lawyers, and you try to put your package together. And once you 
have spent a lot of money to put all that together, the key 
point is, are you generating an economic return that somebody 
will invest in? And if somebody doesn't invest in it, then you 
are going to lose all your money.
    Mr. RANGEL. But they would be the investor.
    Mr. MORAN. Pardon me?
    Mr. RANGEL. The investor would be the person that you are 
turning it over to.
    Mr. MORAN. No, no. I am not turning anything over to the 
investor.
    Mr. RANGEL. You don't keep the property----
    Mr. MORAN. The investor is coming to me because I have the 
asset. He is looking to make a return on his money. And I am 
the one that is going to take all the risk to build the 
project, to go get the bank loans, to guarantee everything.
    Mr. RANGEL. Are all of you satisfied with----
    Mr. MORAN. And the only thing the investor would----
    Chairman CAMP. Well, I----
    Mr. MORAN. Pardon me?
    Chairman CAMP. I think time has expired, but----
    Mr. RANGEL. I just want to know.
    Chairman CAMP. I think, Mr. Thomas, we want to hear your 
answer on this, too, so we will make an exception here.
    Mr. RANGEL. You are a good Chairman.
    Chairman CAMP. I will remember that, Charlie.
    Mr. THOMAS. Well, we actually agree with the other speaker, 
and that is that this is something that we do a lot of work 
for. In many cases we forgo our commissions to put into the 
project, and so therefore we are invested in the project just 
like anybody else. It just doesn't mean that we write a check 
out of it. I guess we could if we took the commission and then 
turned around and put it back in. But there are rationales for 
making it the same as the investor.
    Chairman CAMP. All right. Thank you.
    Ms. Jenkins is recognized.
    Ms. JENKINS. Thank you, Mr. Chairman.
    As I am sure you are all aware, this Committee has spent 
the last 2 years having hearings and releasing discussion 
drafts, and we have been meeting with stakeholders from every 
industry to build a foundation as we seek to achieve what 
others have warned us is a nearly impossible feat of giving our 
constituents a simpler and fairer Tax Code.
    Mr. Thomas, in your testimony I read that the effect of the 
1986 Act had an effect on the real estate industry. Can you 
just elaborate for us on what lessons the Committee Members can 
draw from the last time we overhauled the Tax Code as it 
concerns the real estate industry?
    Mr. THOMAS. Well, what it did to the commercial arena is 
that it really negatively affected prices and the exchange of 
property through that Tax Code change. So if you look at that 
as history and see that it decimated that particular industry 
and what it did to savings and loan institutions at the same 
time, you realize that is the negative effect that you are 
going to see or could potentially see if you did the same thing 
on the mortgage interest deduction.
    Ms. JENKINS. Okay.
    Yes, Mr. Moran.
    Mr. MORAN. May I respond to that question? On the 1986 Tax 
Act there were two things that were very, very detrimental to 
the commercial part of the business. One of them was 
retroactive. So a lot of people had made investments 2 or 3 
years prior anticipating they would receive certain income tax 
deductions and the law would remain the same. Obviously, it did 
not. It changed.
    But the major change that caused all the problems was the 
passive loss rules. What happened is all the capital was coming 
into the commercial industry and all of it was coming into the 
apartment industry from individuals. That was your source of 
capital. And when you passed the passive loss rules and they 
couldn't take any of their deductions and they were making all 
these investments, therefore what we told them when they went 
in, we couldn't deliver, because the law changed.
    But the passive loss rules have taken the individual out of 
the market. Therefore, he wasn't supplying capital. Therefore, 
you had a recession from 1986 to 1994 before we started getting 
transactions going again and capital coming back into the 
business. And it started coming back in through the REITs and 
through the pension fund advisors, so you had two other types 
of entities.
    Today, for example, individuals are still not investing in 
real estate because of the passive loss rules. When you get to 
small towns and you get to secondary and tertiary towns where 
people in those towns used to invest in real estate, they don't 
do it because of the passive loss rules. Not only was it 
devastating between 1986 and 1994, you can still feel the 
effects today because you are saying where is the capital going 
to come from to help us fund our businesses?
    Mr. DIETZ. One more thing. As I mentioned in my testimony, 
the completed contract rules were another example in the 1986 
Act where a change was made and a fix had to be made 2 years 
later. It is a reminder in general that real estate, the tax 
rules manifest themselves in the value of real estate. And so 
any impact on housing, for example, you get a 1 percentage 
point drop in housing prices today, it is going to destroy 
about $177 billion of net worth. You only need a 6 percent 
decline from where we are today to destroy a trillion dollars. 
So housing and the tax rules are very much connected.
    Ms. JENKINS. Okay. Great. The first panel today discussed 
some recent options that have been proposed as part of major 
tax reform, drafts to reform our tax policy as it relates to 
housing policy and promoting home ownership. Today's testimony 
noted 
that recent major tax reform proposals, including Simpson-
Bowles, President Bush's 2005 Tax Reform Advisory Panel, and 
the Bipartisan Policy Center have all recommended moving from 
an interest deduction to a tax credit. And I understand that 
these proposals are concerning to some of you and potentially 
threaten our recovering housing industry.
    So could you just share with us, has the housing industry 
conducted any analysis on what these policies--what effect they 
would have on home prices?
    Mr. DIETZ. The real problem with the housing credits we 
have seen as a replacement for the MID is that the rates are so 
low they become nonstarters. A 12 percent rate is the most 
common. A revenue neutral tax credit would be something like 20 
percent. So when it is down at 12 percent, you are really 
looking at a big tax hike for homeowners.
    In terms of price impacts, the impacts are going to be the 
largest in those high-cost areas. Where the average income is 
higher, the marginal income tax rate is going to be higher, so 
that represents a larger tax hike.
    Ms. JENKINS. Okay. I yield back.
    Chairman CAMP. Thank you.
    Mr. McDermott is recognized.
    Mr. MCDERMOTT. Thank you, Mr. Chairman. Mr. Moss, see, I 
come from Seattle where we spend a lot of effort politically 
passing initiatives for low-income housing and we have passed 
levies on almost a continuing basis for the last few years to 
build housing. So we have a lot of low-income housing that is 
managed by a variety of public agencies in some instances, and 
sometimes private nonprofits are running them. And we have 
Section 8 going on in our State like everybody else does.
    Tell me, from your point of view, the place where we ought 
to put our emphasis on low-income housing. Where should the 
money go if you are going to be the most effective? Is it in 
government building houses as we did before Ronald Reagan or is 
it in the low-income tax credit stuff in 1986 and thereafter or 
is it in Section 8?
    Because I see us coming to a point where we are having more 
and more old people in this society who are going to be looking 
for housing as they are forced out by taxes and other things. I 
am trying to figure out for the community where is the most 
effective--or what is the most effective way to put the housing 
up?
    Mr. MOSS. Well, first of all, starting in 1986 when the tax 
credit was put in place, the low-income housing tax credit, it 
started to replace all the failed Federal programs that had 
gone on prior to that time, programs that did not have the 
private sector involved, that did not have the private sector 
with risk in the game.
    And, today, the low-income housing tax credit is the 
highest performing real estate class in the United States of 
any real estate class because of the private sector 
involvement, because of the State agencies doing the oversight 
and the underwriting and assessing housing need, and due to the 
nature of the type housing that is being built, which is very 
high-quality housing.
    The programs from the past, the Federal programs, are now 
being preserved using the low-income housing tax credit. They 
are being regenerated by bringing in the private sector.
    Mr. MCDERMOTT. You mean you are taking the old federally 
built ones and turning them into low-income housing tax----
    Mr. MOSS. Yes, sir. We are bringing in the investors, 
renewing the projects, making sure that the units are rehabbed 
in a sustainable fashion so they will last another 40 years. It 
is a very important role that the credit plays, in that it can 
play every position on the team. It can really fix rehab--
housing that needs rehab, Federal housing, it can do new 
construction, it can build housing for those individuals that 
have disabilities. It can build veterans housing. It is a very, 
very flexible program. I hope that answers your question.
    Mr. MCDERMOTT. There is one in Seattle named the McDermott 
Place which has 54 homeless veterans living in it, so I know 
about how it is done. But you didn't say anything about Section 
8. Where does Section 8 fit in all of this?
    Mr. MOSS. Well, Section 8 is not an operating new 
construction--production program.
    Mr. MCDERMOTT. I know it doesn't produce, but it is a way 
of saying you haven't got a house, so here is a voucher. Go 
find someplace in the private sector that will take it. Is that 
a more effective way than building and operating it as low-
income housing?
    Mr. MOSS. No, I don't believe it is. I believe that having 
the private sector involved----
    Mr. MCDERMOTT. The private sector is involved in Section 8, 
aren't they?
    Mr. MOSS. They can be, where the project receives project-
based funding or vouchers to support extremely low incomes 
which support the debt service for the property. But those 
Federal programs also had subsidies for debt when the 
properties are redone and rehabbed under the tax credit 
program. It is at conventional debt rates and the vouchers and 
the subsidy provide subsidy to the renter, not to the property.
    Mr. MCDERMOTT. What do you think the deficit is--excuse me. 
Go ahead.
    Mr. MORAN. On the Section 8 question, I agree. When prior 
to 1985 we did several projects and those projects were Section 
8-based projects, that was when passive losses were not a 
limitation, so we had all private capital doing those. We still 
have those properties today and those investors are happy with 
that investment over all the years, but they needed the passive 
loss rules in order to get that deduction in order to bring 
that capital into the business. Project-based Section 8 works 
better than vouchers.
    Chairman CAMP. Mr. Renacci.
    Mr. RENACCI. Thank you, Mr. Chairman. I want to thank the 
panel for being here today. This morning I was talking with the 
earlier panel about simplification, how we have to make this 
program simpler, because that person that comes in with just a 
W-2 needs to be able to get their return done without a 
professional. As I said, I was a professional, I had a CPA 
practice for many years prior to coming here.
    On the other hand, I also indicated there are some people 
that aren't even aware that the interest deduction helps them, 
although it does, because of the complications of the Tax Code. 
And I think, after everything, they found out that the interest 
deduction was helpful to them.
    But one of the interesting comments in the earlier panel 
was somebody had indicated that repealing the mortgage interest 
deduction would reduce home prices by roughly 13 to 15 percent. 
Any comments on that? I thought that was an interesting number.
    Mr. THOMAS. Well, our number is very similar. The number 
that our economist has come up with is about 15 percent. That 
would be devastating to this economy if we were to do that. Do 
you understand what that would do, putting that many more 
people under water, that would increase the number of 
foreclosures again. It would blow way out of proportion. We 
believe it would throw the country back into a recession. So 
that would be devastating if it were 15 percent.
    Mr. DIETZ. Our numbers are--it is smaller, but similar. You 
could have dueling economists, what is the right price effect? 
It is going to differ by area, it is going to be larger in 
high-cost areas. But the big thing is it will impact. And I 
mentioned before, for every 1 percentage point, it is about 
$177 billion off of household net worth. If you are talking 15 
percent, you are talking up to a $2 trillion windfall loss for 
homeowners.
    Mr. RENACCI. Mr. Moran, President Obama has proposed 
lowering the corporate tax rate to 28 percent. I heard in your 
testimony not only are you a CPA but you represent an industry 
that has a lot of partnerships and LLCs. What would you say to 
those who advocate for doing corporate tax reform only and how 
would it affect your members?
    Mr. MORAN. Our position has always been we are looking for 
comprehensive tax reform and to do both the corporate and the 
individual at the same time, because there would be crossovers 
on certain provisions. And we don't think one should be 
penalized--to bring down the rate over in the corporate, we 
shouldn't penalize the individual. So I think it should be 
looked at at the same time. We are not averse to the rate 
coming down. We think the rate should come down overall, 
because on a competitive basis to bring money into the United 
States we need to have a global rate that makes sense. And our 
global rate is higher than that of other people.
    Mr. RENACCI. But you are saying corporates, LLCs, 
partnerships should all be looked at as one corporate rate?
    Mr. MORAN. No, no, no, I do not say that. There is 2.5 
million partnerships in this country. They control about $12 
trillion of assets. They generate $400 billion a year in 
income. And all of those partnerships are there for a reason. 
There are different people putting up money. There are 
different people taking risks and they are allocated 
differently. So they don't run like corporations.
    Mr. RENACCI. I understand that, but when we look at 
corporate tax reform, I am saying we should be looking at all 
the entities?
    Mr. MORAN. Yes.
    Mr. RENACCI. One other question. Mr. Thomas, this is for 
you but others can answer. The Tax Code currently allows 
deduction for interest on mortgages up to $1.1 million. Do you 
think that is appropriate? What is an appropriate level?
    Mr. THOMAS. I think it is appropriate because of the area 
in which I live and work. So, obviously, I think it is 
appropriate. It is taken where it is needed. Across the country 
there aren't that many people that go all the way up to the 
maximum. But, again, in my particular area, $500,000 buys a 
starter home. If you were to reduce the limit down to $500,000 
that is going to negatively affect most of the coastal areas of 
the country where the prices are much higher. So it would have 
a negative effect.
    Mr. DIETZ. In addition to high-cost areas, you could also 
have stocking issues. If you have multiple home ownership, for 
instance someone who is about to retire and they have one home 
where they work and one home where they plan to retire soon, 
two they own simultaneously, that limit is for both mortgages, 
both homes under Section 163.
    Mr. RENACCI. Mr. Chairman, I yield back.
    Chairman CAMP. Mr. Neal.
    Mr. NEAL. Thank you, Mr. Chairman. Just a quick comment 
based on previous experience in terms of dealing with Section 
8s. It is the saturation point on Section 8s that begin to 
change neighborhoods, it is the concentration of Section 8s. I 
think that is one of the challenges, because as I pointed out 
to the other panel, there are few issues that are more complex 
in urban economics than housing. In the experiments we had in 
the 50s and 60s with many of our veterans coming back, it 
worked very well. And then as the housing grew much older and 
there was less money to keep it up to date, in old cities 
landlords began to walk away from properties. And one of the 
phenomena during those years was abandonment. For those of us 
who had to deal with that abandonment issue, it was very 
significant because we had great difficulty tracking down the 
landlord. And I think having the private sector involved in 
helping to discipline the aspects of the marketplace is 
terribly important.
    Mr. Moss, I am surprised that you mentioned the shortage of 
affordable housing. And it is always important I think to use 
the term ``affordable housing,'' because the connotation of 
low-income housing, again, is that you are going back to high-
rise developments and that you are going back to a 
concentration of Sector 8s. But you mentioned that there is a 
shortage of affordable housing in your testimony. Would you 
speak to that issue, please?
    Mr. MOSS. Yes, the Harvard study that was most recently 
published, the report showed that only four eligible low-income 
households out of ten were finding an apartment that achieved 
affordability for them. Four out of ten. So there are six 
households out of ten that cannot find an apartment where their 
rental costs are 30 percent of their monthly income or less. 
They are paying 50 percent, 60 percent of their monthly income 
in rent. And so the rent burden is tremendous in this country.
    The Harvard report demonstrates that, sir, and also the 
recent Bipartisan Policy Housing Center report.
    Mr. MORAN. One of the confusing things--on affordability, 
we need to define it. Some people say affordability is 80 
percent of the median income. And if you do 80 percent of the 
median income, like the apartment industry, 90 percent of the 
available housing is affordable. The low-income, where you can 
only afford to pay 50 or 60 percent or 40 percent of the median 
income, is where the real problem is. So it is the low-income 
which needs to be subsidized and needs to have the credits and 
needs to have the Section 8s if that gap that is currently 
there is going to be closed.
    Mr. NEAL. But I also think it is fair to say that 
management is a key issue.
    Mr. MORAN. Yes.
    Mr. NEAL. On how those units are managed.
    Mr. MORAN. Yes.
    Mr. NEAL. If you get some first-class management teams 
nobody would even know it is affordable housing or subsidized 
housing. And then if you get a bad management team that simply 
accepts the subsidy and walks away from the property when 
things start to go south for them on their other investments, 
and that is frequently what happens, they stop any sort of 
upkeep to the property. And I think we need to be mindful of 
that.
    How would you strengthen the low-income credit? I have been 
a supporter of new markets and low-income housing credits. I 
think it works. How would you propose strengthening the option?
    Go ahead.
    Mr. DIETZ. Your bill with Mr. Tiberi that----
    Mr. NEAL. I was hoping you would say that.
    Chairman CAMP. I don't see a prompt here, do I?
    Mr. DIETZ. Without that the credit rate on the tax credit 
falls and it results in 18 percent less equity in the deal. So 
fixing that rate ensures that a sufficient amount of equity is 
available, because this is a production program. And we heard 
in the earlier panel, economists like vouchers in theory. But 
vouchers don't help build the property. They help allocate the 
demand after the fact. This program is really useful in the 
sense that it provides safe affordable housing on the 
production side.
    Mr. NEAL. Thank you, Mr. Chairman.
    Chairman CAMP. Thank you. I will go to Mr. Blumenauer and 
then we will close with Mr. Griffin.
    Mr. BLUMENAUER. Thank you very much. I appreciate the 
special emphasis that several of you have made in terms of the 
low-income tax credit. I think it is important to drive that 
home when there is so much in flux. I would just put three 
things on the table because you all represent groups that have 
certified smart people and it might be useful to get a little 
context and feedback from you. So I will put the three and then 
I will get out of your way.
    One, you may have heard comments that I made earlier about 
the impact of the Federal Tax Code subsidizing people who live 
in areas that are frequently prone to disaster, and in fact 
some of them are in areas that by Federal law were not supposed 
to provide infrastructure support from the Federal Government. 
Yet we are subsidizing, for example, on a second home and then 
after we pay Federal money to help clean things up, then they 
go right back and are able to qualify for a deduction. And I 
would appreciate it if, again, this might be something that 
some of your certified smart people might be able to help us 
with in terms of some feedback.
    The second deals with strengthening the provisions--I have 
long felt comfortable with the notion of having the capital 
gains exclusion for residential real estate, because nobody 
paid it except the dumb, the distressed, or the divorced. But 
there have been instances that have been described to me where 
people use the provisions under current law where it is two out 
of the five, but they use it to sort of serially flip, bouncing 
back and forth with a residential property and switching that 
advantageously to be able to serially harvest the capital gains 
exclusion. It is not something that is a long-term residence 
that they are a part of. If you have some thoughts, or if there 
is some smart person there that could give us a written 
response, it would be appreciated.
    The final question that is of interest to me is, today, the 
extent to which residential property represents people's 
retirement security. Notwithstanding the fact that a lot of 
folks are under water and they are up and down, but we are 
watching pensions disappear, we are watching 401(k)s become 
201(k)s, we are watching a number of people tapping early 
retirement because of financial problems. They are retiring 
early with Social Security. They are taking things out of their 
401(k)s, their IRAs. If you could help us identify the role you 
think residential property plays in retirement security going 
forward, it would be something that I would be very interested 
in.
    Mr. DIETZ. On the gain exclusion in 2008 in HERA, the 
Housing Economic Recovery Act, there was a change made in 
Section 121 to address that two of five provision. And it was a 
change that was supported by the industry at the time. It 
stipulates that you can't claim the gain exclusion for years in 
which you don't use the property as your primary residence. So 
someone who is using it for speculation or an independent 
landlord or owning it for a long period of time----
    Mr. BLUMENAUER. My question is, is that tight enough to 
prevent people from intent to reside being able to game the 
system?
    Mr. DIETZ. And on the third issue that you raised, we have 
papers and research on the importance of housing wealth. It did 
take a big hit. Household net worths declined 40 percent. 
Polling surveyed consumer finances from 2000 to 2010. But 
recent price gains have begun to repair that, and, obviously, 
for those reasons the housing tax incentives will go in the 
opposite direction.
    Mr. BLUMENAUER. Thank you, Mr. Chairman. I would just 
welcome any of those little papers that you have in those 
areas.
    Mr. THOMAS. Sure. On the first question that you had I 
might comment that is really a local land use issue. Because if 
authorities are going to continue to allow building there, 
people are going to continue to build. That is where the 
problem lies.
    We, as realtors, supported phasing out subsidized flood 
insurance last year. So, you know, we understand.
    Mr. BLUMENAUER. But if we get rid of the tax deduction it 
would be recommended. Thank you, Mr. Chairman.
    Chairman CAMP. Mr. Griffin is recognized.
    Mr. GRIFFIN. Thank you, Mr. Chairman. Thank you all for 
being here today. And I know that you all share our general 
goal of simplifying the Code and having a pro-growth Tax Code. 
There are certainly provisions in it that I know you favor. But 
we can all agree that it is a mess. And we are trying to make 
it better.
    You have--I assume you heard some of the folks on the first 
panel give some of their ideas on what they would prefer to see 
instead of the mortgage interest deduction that we have. One of 
those proposed is some sort of credit. I would like to first 
hear from you four--whoever wants to speak--what your opinion 
is on the credit, and how it would impact what we consider 
middle-income Americans who rely on the mortgage interest 
deduction.
    Mr. DIETZ. The first problem with the credit is the rates. 
We saw a 15 percent rate proposed in 2005. A 12 percent rate 
proposed by recent commissions, including the Bowles-Simpson 
commission. That rate is so low compared to the marginal tax 
rates, which is still the comparable value, that it reports a 
significant tax hike for homeowners.
    So the question is who are the winners and who are the 
losers? There might be some winners, but we most definitely 
know who the losers would be moving to that kind of credit from 
the existing deduction. It would be young folks who have to use 
a mortgage to buy a home in high-cost areas.
    Mr. GRIFFIN. I think that it is fair to say and I think you 
would agree with this, that credits suggested or changes 
suggested also assumed that marginal tax rates are changed. And 
some of the analysis that I have seen or heard of the credits--
and we discussed this a little bit with the earlier panel--
assume that you have to have some sort of change in that 
marginal tax rate.
    Can you comment on it? Because clearly if you took the 
marginal tax rate down to a high of 25 percent, for example, 
clearly that is going to be favorable to people like me who 
count on the mortgage interest deduction, along with a lot of 
middle-income Americans. So how does that change in any way 
your analysis?
    Mr. DIETZ. Pro-growth tax policy that creates jobs, would 
raise wages and make the economy grow faster. That is good for 
housing. But, as you say, there are a lot of assumptions. And, 
for example, one of the assumptions with moving to a tax credit 
is what happens to the real estate property tax deduction? The 
proponents always focus on the MID to a tax credit, but they 
don't explain, well, we assume the property tax deduction is 
completely eliminated. That could also reduce the value for 
home buyers.
    Mr. GRIFFIN. Is there anyone else that wants to comment on 
that? Okay. I thank you all for being here.
    Quickly, I think I have another minute, there was a comment 
made on the previous panel that the mortgage interest deduction 
incentivizes debt as opposed to equity. Do you have any comment 
on that?
    Mr. DIETZ. My reaction when I hear that is, people don't 
take out debt to make money. You pay interest; it is a cost. 
Mortgage interest deduction offsets the cost of that debt. The 
question is who needs debt to buy homes? Well, it is 
particularly younger households and, in fact, our research has 
shown the primary beneficiaries of the mortgage interest 
deduction with shared household income, is younger households 
that need the mortgage to buy a home. If you get rid of it, 
prices are going to fall and who wins? Cash buyers, investor 
buyers. That is not good policy for a stable middle class.
    Mr. THOMAS. Yes, and I would also say that increasing the 
debt and the amount that you pay on that debt, you are not 
getting that entire amount back in a tax benefit so the law 
doesn't really encourage you to take on more debt.
    Mr. GRIFFIN. Well, I think we are all looking very 
carefully at this because we understand that whatever changes 
we make are going to have an impact, positive or negative, on a 
lot of Americans that count on this that are having a hard time 
making ends meet anyway. But we are focused on having a 
simpler, fairer Code that encourages economic growth which will 
benefit us all.
    Thank you all for being here today. It was really 
thoughtful and we appreciate it.
    Chairman CAMP. Thank you. We do have one more questioner, 
Mr. Young, and then we will conclude the hearing.
    Mr. YOUNG. Thank you, Mr. Chairman. It has really been a 
very informative hearing here. I thank all our panelists for 
appearing here today and for delivering your testimony.
    Earlier, we had a panel where we received testimony that a 
disproportionate share of the home mortgage deduction benefits 
go to taxpayers in the largest metropolitan areas. One witness 
testified that 20 percent of the tax benefit is claimed by 
taxpayers in California.
    First, do you have any reason to believe that that 
testimony was incorrect? And, if not, then do you have concerns 
about this? Concerns about the disparate benefits between 
geographic areas and between types of communities across our 
country as reflected in the Tax Code?
    Mr. DIETZ. You know, the mortgage interest deduction 
obviously is on a nominal dollar basis more valuable in high-
cost areas. But, as I mentioned in our testimony, that is 
actually one of its merits in the sense that it is one of the 
elements, one of the few elements in the Tax Code that does 
account for differences in the cost of living. Property tax 
deduction is the same way. You want an incentive that 
encourages young home buyers to be able to buy in high-cost 
areas. Why are they high-cost? They are high-cost because they 
have dense concentrations of population. That is where things 
are growing. That is where wages are growing. And if you shut 
out those younger home buyers from those kinds of markets, that 
is going to have a distinct economic impact.
    Mr. THOMAS. And those areas are obviously very, very 
concentrated in numbers of households and so you are going to 
have a disproportionate share. The number of households in 
California is much higher than in most of the rest of the 
country anyway. So you are going to have that effect. Plus, 
just the sheer cost of building in those areas produces higher 
costs.
    Mr. YOUNG. If there is no other thoughts or perspectives on 
that, I thank you again and I yield back.
    Chairman CAMP. Is the 20 percent accurate?
    Mr. THOMAS. I don't know that it is. We would have to do 
research on that. That seems awfully high.
    Chairman CAMP. I want to thank this panel. You have been an 
excellent panel. And I appreciate your views and your 
perspectives and, obviously, as I have said, tax reform is a 
critical issue to this Committee and we remain committed to 
moving forward in an open and transparent manner. And your 
participation today is obviously a very important part of that 
process.
    I would ask that you promptly respond in writing to any 
areas where that was requested or would be appropriate, and as 
we prepare the formal hearing record we will make those written 
submissions a part of that. So, again, thank you very much for 
being here. The Committee stands adjourned.
    [Whereupon, at 1:05 p.m., the Committee was adjourned.]

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