What the new GOP tax bill means for housing and urbanism

On Thursday, Republicans in the House of Representatives dropped their first draft of a tax bill. The bill proposes a radical shift in the US tax code, on everything from income tax rates to deductions.

There’s a lot in the tax code that applies to homeownership, affordable housing, and cities in general. While details and analysis are still coming out, here’s what we know so far about some of those issues.

The bill would cap the mortgage interest deduction at $500,000

The Mortgage Interest Deduction (MID) is by far the largest housing policy in the country. We spend more on this tax program than every other HUD program for affordable housing combined. And, as we’ve written about a few times before the MID goes primarily to subsidizing the mortgage debt of the wealthiest households, rather than encouraging homeownership.

One important reason why it’s such an inequitable program is because it requires you to itemize your tax deductions in order to claim it—something that’s generally not done by low- and middle-income households, who usually claim the standard deduction.

The proposed cap on the MID would only allow you to claim it on the first $500,000 on any new mortgage. That means the old MID cap of $1,000,000 is grandfathered in for existing homeowners; that’s definitely a reprieve for high-cost areas like parts of the Washington region.

In isolation, this change would make the MID more equitable. But the GOP bill also nearly doubles the standard deduction, which means even fewer middle class homeowners in the future will claim the benefit. When you look at the tax plan in totality, it actually boosts the MID’s effect on the country’s growing wealth inequality.

There are a lot of really excellent proposals for reforming the MID. For instance, we could cap it at $500,000 but convert it to a tax credit that would apply to all homeowners, regardless of income. Instead of putting the savings of capping the MID towards tax cuts for billionaires, as the current plan does, we could reinvest that money in assistance for renters, first-time homebuyers, and households saving for down payments.

No more deducting many state and local taxes

One of the bill's biggest effects is to stop allowing people to deduct state and local income taxes from their federal taxes, which is allowed today. This change will hit taxpayers in higher-tax jurisdictions hardest, including many of the states with the most walkable urbanism and our region. This could seriously hamstring many progressive states and cities that look to their own tax code to enact policy change.

Homeowners will be allowed to deduct up to $10,000 of local property taxes, but that again only benefits those who itemize and not renters or those who use the standard deduction.

Funding for low-income housing will take a hit

Since the 1980s, nearly all new affordable housing in the country has been financed by the Low Income Housing Tax Credit program, or LIHTC. It’s provided more than two million below-market-rate units across the country.

LIHTC is an incredibly complicated program (Brian McCabe wrote a great explainer for GGWash here), but the important take-away is that it’s a program that’s dependent on market forces: corporations and investors bid on the credits, so if the economy is in a recession or if there’s less of a need to offset corporate taxes, investment in affordable housing goes down.

So it’s no wonder affordable housing advocates are seriously concerned by the new tax bill. Though the tax bill retains LIHTC, by cutting the corporate tax rate to 20 percent, it would seriously reduce incentive to invest in the program.

Other tax programs are slashed, for better or worse

The House bill eliminates a vast range of tax credits and deductions in the name of simplification. One of the programs that gets the axe is the Historic Preservation Tax Credit, which helps restore and rehabilitate culturally significant buildings. Historic Preservation Tax Credits are a tool of affordable housing too—they’re often paired with LIHTC to finance the preservation or creation of affordable units.

Tax Exempt Bonds used to in the construction of sports stadiums would also be eliminated. While this would still allow cities to subsidize the construction of private stadiums, it removes an one of the largest tools for doing so.

There’s more to come

As the House tax bill is combed over and analyzed (and when the Senate’s version is inevitably released), there will certainly be more news for how tax proposals would affect the people and places of our region.

What changes would you see in the Washington region if the House tax bill passes?

This post has been updated to include information on the New Markets Tax Credit.