Real Estate Industry Takes Aim at Tax Reform

May 22, 2006

One of the key players in helping to shelve the recent recommendations of the Tax Reform Panel held its annual Midyear Legislative Meetings in Washington last week. The National Association of Realtors (NAR) exerts enormous pressure on members of Congress, and in the process, has repeatedly helped to defeat meaningful tax reform by preserving the preferential (and distorting) treatment that housing receives from the tax code relative to other forms of investment.

From the Realtors’ own magazine reporting on last week’s meetings, we get this report on how NAR has helped to defeat tax reform:

NAR tax counsel Linda Goold briefed attendees on potential tax challenges. Goold pointed out that a full-fledged revamping of the federal tax code hasn’t taken place for 20 years and seems unlikely in the next few years, given the current political climate. But that doesn’t mean that real estate can relax, said Goold. One issue is that many high-profile economists don’t view real estate as a productive asset, like stocks and manufacturing. “We must fight this,” she said.

Another challenge could grow out of the increasing need for revenue to cover recent tax cuts and government programs. Goold pointed out that real estate accounts for between 25 percent and 30 percent of tax breaks in the current tax code — bested only by employer deductions for health care benefits and deductions for 401(k) and other pension plans. With the first baby boomers set to turn 65 years old in the next five years, “where do you think a government starved for revenue is likely to look? Real estate,” said Goold.

Those high-profile economists that Ms. Goold “must fight” are actually 100 percent correct. But Goold’s interpretation of the viewpoints of economists is also misleading. These economists do not feel that real estate isn’t productive. They just (correctly) point out that we have a tax code that rewards real estate up to a point at which investing in it beyond a certain level is not as productive as investing in other forms of capital. What the real estate industry wants (and has been receiving for the past 75 years) is an uneven playing field in investment that benefits real estate, thereby causing over-investment in housing relative to other capital ventures, which is what any unbiased economists would oppose as well.

On the plus side, at least Goold does acknowledge that real estate does receive a large portion of the tax breaks in our current income tax code, and that they are significant enough to be possible future revenue sources. But if you turn this around, however, she is basically saying that these current tax breaks are extremely costly, thereby driving up the marginal tax rates that everyone else has to pay and/or budget deficits.


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