The Treasury Department tipped its hand this week on the politically sensitive question of federal income tax relief for renters. The message was not favorable.
Treasury is faced with the prospect of losing billions of dollars of tax revenues if renters are encouraged by states-starting with New York-to take federal deductions for the property taxes paid on their units, and the department has served notice that is doesn't relish the idea.
In a meeting this week with members of the New York State Legislature, Internal Revenue Service officials indicated that they will rule shortly against provisions of a law signed by New York Gov. Hugh Carey last year that would allow New York tenants to claim federal deductions on the portion of their rent that goes toward real estate taxes.
The legislators had come here to press for an affirmative revenue ruling from IRS, a ruliing that is technically required before New York renters can begin taking property tax deductions with the confidence of avoiding later penalities.
The statute-which would affect taxes paid a year from now-has been regarded as a national model for dozens of other states eager to enact tax relief measures for apartment dwellers. The law requires rental property owners throughout New York to function, in effect, as tax-collecting agents for their local municipalities, and makes tenants liable for pro-rata shares of the property taxes on their buildings.
Tenants would continue to pay their regular rents, but a portion of each payment would be predefined-on the basis of square footage of the unit in relation to total rented space in the building-as being attributable to the local property tax. Landlords would report the property tax component as income, but would continue to deduct them as an expense item for federal tax purposes.
New York landlords would neither lose federal deductions nor gain them under the plan; only tenants would be aided.
A tenant in a building who pays$500 a month in rent-25 percent of which goes for property taxes-could deduct $1,500 under the state plan. If the tenant were in the 30 percent federal tax bracket, he or she would save $450 on federal taxes. Tenants in higher brackets would serve even more.
About $120 million would be cut from taxes owed by New Yorkers to the federal government in the first year alone, according to estimates prepared in Albany.
State proponents of the law believe the revised assignment of legal responsibilities creates a legitimate, definable property tas expense for renters that qualifies under existing IRS tests for deduction of local real property taxes. Leaders of the partment construction industry, tenants organizations, elderly groups and others vigorously supported the New York las as a long-needed redressing of the imbalance between treatment of homeowners and renters under the federal tax code.
Financial help to renters is necessary, they argue, to put multifamily housing back on its feet and slow the wildfire conversion of apartments into condominiums in many urban areas. Homeowners routinely get to deduct local property taxes and mortgage interest; they saved $11 billion in federal taxes last year as a result. Renters, on the other hand, receive no such direct tax subsidies.
Legislators in a number of states support the concept, and moves have been under way in Michigan, Minnesota and California to duplicate the New York law.
The only obstacle to all this appears to be the Internal Revenue Service. It after all, is the sole party that stands to lose money from renter tax relief. And if this week's meeting with the New York legislators was any guide, the IRS intends to squash the plan soon.
In a private meeting, IRS officials said they don't believe the New York statute creates a legally binding requirement on tenants to pay property taxes on the units they occupy. Therefore, they said, it doesn't create actual obligations for renters, and the deductions aren't to qualify for federal tax purposes.
According to a spokesman for New York State Sen. Roy M. Goodman, "IRS pulled the rug out from under our state law-or at least said it plans to do so." IRS expects to issue its formal ruling next month.
Goodman said he wasn't certain whether to challenge the stance of the officials by appealing directly to Treasury Department superiors, or to devise amendments to the New York law aimed at getting around IRS's rule.
National proponents of renter relief are likely to look now to Congress, where two bills that would essentially accomplish the same thing as the New York law were recently introduced.
Rep. Herbert Harris (D-Va.) has 53 co-sponsors for his bill, which would allow a tax credit equal to 25 percent of any tenant's proportional share of property taxes for his or her unit. The credit would be superior to a deduction for lower- and moderate-income taypayers, who tend to take the standard short-term deduction for federal tax purposes rather than itemize.
Rep. Robert K. Dornan (R-Calif.) has introduced a renter relief bill that goes two steps further: it would permit a credit for up to 30 percent of the proportionate share of property taxes and would make the credit refundable back to the 1978 tax year.
Both bills have been referred to the tax-writing House Ways and Means Committee. The Carter administration and the congressional Democratic leadership probably will oppose the measures in this budget-conscious year, but pro-tenant forces say they plan to push energetically for the bills later this session.