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How Biden’s Tax Plans Could Negatively Impact Housing

4 min readBy: Jeremy Ashe

Within the last year, the median sales price of houses sold in the United States rose by 16.2 percent while sales of new single-family houses dropped by 19.4 percent, an indication that demand for housing continues to outpace supply. While President Biden has many proposals aimed at increasing the supply of affordable housing, including tax creditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. s, his plans to raise business taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. es could hinder that goal.

Biden’s proposed corporate and pass-through businessA pass-through business is a sole proprietorship, partnership, or S corporation that is not subject to the corporate income tax; instead, this business reports its income on the individual income tax returns of the owners and is taxed at individual income tax rates. tax increases could reduce the supply of housing by raising the after-tax cost of building homes. In addition, raising the capital gains taxA capital gains tax is levied on the profit made from selling an asset and is often in addition to corporate income taxes, frequently resulting in double taxation. These taxes create a bias against saving, leading to a lower level of national income by encouraging present consumption over investment. rate on households making more than $1 million per year, to 39.6 percent from 20 percent, could increase the lock-in effect for some households with large, unrealized capital gains on their homes (above the $250,000 per person exemption). Given the recent increase in the sales price of houses, many households selling homes could enter the $1 million per year threshold and decide not to sell.

Biden’s proposal for a 15 percent minimum tax on book income, or the income corporations report on their financial statements, could affect the mortgage industry. Timing differences account for some of the gap between book incomeBook income is the amount of income corporations publicly report on their financial statements to shareholders. This measure is useful for assessing the financial health of a business but often does not reflect economic reality and can result in a firm appearing profitable while paying little or no income tax. and taxable incomeTaxable income is the amount of income subject to tax, after deductions and exemptions. For both individuals and corporations, taxable income differs from—and is less than—gross income. , including the treatment of mortgage servicing rights. Tax penalties arising from such timing differences could increase the cost of servicing mortgages, which could lead to less servicing, higher interest rates and fees, and market volatility.

The Biden administration has also proposed enacting a global minimum tax, which could impact private mortgage insurers (PMIs). Home buyers who put down less than 20 percent of the purchase price as a down payment must obtain private mortgage insurance to protect the lender against default. PMIs use global reinsurance (insurance for insurance companies) to spread their risk; for example, in 2020, more than 30 percent of risk was shared with non-U.S. sources. A higher corporate tax burden could increase the cost of reinsurance, leading to higher costs for private mortgage insurance.

These effects would work in opposition to the Biden administration’s desire to increase the supply of affordable housing through tax credits.

The American Jobs Plan (AJP) includes an additional $55 billion for the creation of low-income housing through the Low-Income Housing Tax Credit (LIHTC). The LIHTC is a large source of affordable housing financing, yet it is riddled with many inefficiencies. LITHC-financed homes are often subject to unnecessary construction costs; fraud, such as developers and investors abusing the LIHTC allocation process and taking more money than needed; and wasted money on bureaucratic complexities. Further, the LIHTC is not efficient at expanding the housing supply: according to a paper from the Journal of Public Economics, each unit built by the LIHTC only expands the overall housing stock by one-third to one-half a unit, as those subsidized structures often crowd out private housing projects.

Another proposal included in President Biden’s American Jobs Plan is the Neighborhood Homes Investment Act (NHIA), introduced in both the Senate and the House. It would create $20 billion worth of tax credits for investors for the construction or rehabilitation of homes in struggling neighborhoods. While it is estimated that each $1 billion in NHIA investment would build or rehabilitate 25,000 homes, the NHIA may be plagued with the same inefficiencies as the LITHC.

During the 2020 election season, Biden proposed a tax credit for Americans buying new homes, now in Congress in the form of the First-Time Homebuyer Act. A tax credit of 10 percent of a home’s purchase price, up to $15,000 for the purchase, would be available for new home buyers. This credit is similar to the first-time home buyer tax credits enacted between 2008 and 2010, aimed at stabilizing falling house prices and reducing housing inventory. According to a Congressional Research Service report, however, the impact of previous tax credits on housing demand remains unclear and “lower home prices may still be the primary determinant for a potential buyer.” This proposal would reduce federal revenue by about $165 billion over 10 years, according to Tax Foundation modeling.

The Biden administration’s tax proposals are a mixed bag for housing affordability. Higher corporate taxes may increase barriers to housing, and though the subsidies are designed to incentivize new investments and home buying, they are likely inefficient. Instead of pairing the increased tax credits with business tax changes that undermine the goal of increased housing supply, complementary business tax changes, such as neutral cost recovery for structures, would be more productive.

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