Richard Rubin reported in the Wall Street Journal over the weekend that the National Association of Home Builders had turned against tax reform:
The National Association of Home Builders, which had expressed openness to changes in the mortgage interest deduction, decided it couldn’t back the GOP bill. The association’s leaders made the decision after top Republicans this weekend said they wouldn’t accept an idea home builders and lawmakers had been working on: repealing the deductions for mortgage interest and property taxes and replacing them with a new tax credit.
Instead, the bill will retain an itemized deduction for property taxes, the House Ways and Means Committee said late Saturday. That is a concession to lawmakers from high-tax states such as New York and New Jersey.
I understand the incentive to appease GOP members from the tri-state area; however, this swap is exactly the opposite of what we want to achieve with tax reform. The core goals are to move folks off of itemizing and into the standard deduction. To that end, credits are superior to deductions. Deductions not only increase the complexity of the code, but they compound in power. The more likely someone is to take one itemized deduction rather than the standard deduction, the more it is to their advantage to try to take other itemized deductions. This compounding effect is what makes tax reform so difficult, and why it needs to be done in one swoop.
Moreover, credits favor middle-income tax payers over higher income tax payer. Credits pay out equally while the value of itemized deductions depends on one’s tax bracket.
If the GOP needs to appease its members in New York and New Jersey, then perhaps a tax credit for 20 percent of property taxes paid is the way to go. This would give relief to both middle-income and affluent tax payers, while preserving the incentive for more tax payers to take the standard deduction.