The Dec. 27 editorial "Good Roof," regarding housing policy and the Treasury's loss of $27 billion in taxes through homeowners' deductions of mortgage interest and property taxes, stopped short of explaining the worst of the effects on housing: the escalation of the initial price of housing.
A tax shelter of any sort is, ipso facto, a redistribution of wealth. The $27 billion Uncle Sam forfeits is transferred mainly to sellers of raw land (whose profits can be in hundreds or thousands in annual percentage rates), then to land developers and home builders and finally to home sellers (transferred employees, those "moving up," etc.). And why build new housing or rehabilitate old housing for the poor when the location (land) is ripe (affordable) for middle- or upper-income housing?
Realtors two decades ago began selling housing with printed tables showing the effective monthly and annual cost of ownership after accounting for mortgage interest and property tax deductions. Today, for example, for a house with a new mortgage of $100,000 at 10 percent for 30 years and annual property taxes of $1,500, the current discounted worth of the interest and taxes for a 10-year ownership term, at a safe reinvestment rate of 8 percent, is $65,790. If the owner remains at a 28 percent federal and a 6 percent state income tax bracket, the capitalized value of the tax shelter is $21,263. This is the price increment to the buyer and the excess profit to all the agents in production. Absent the markup for the tax shelter, the house would sell for that much less.
Congress should abandon all forms of residential tax shelters -- but gradually, so as not to shock all those involved in housing production. The 1986 tax act restricted real estate investors to 27 1/2-year and 31 1/2-year straight-line depreciation for apartments and commercial property -- less shelter than was provided by the 1946 act -- and the market did not die. Costs for privately owned housing will be reduced when tax shelter gimmicks are removed. M. B. HODGES JR. McLean