Rethinking Limit on 2nd-Home Deductions

Think about a tax reform that penalizes middle-income families but makes life easier for the rich -- particularly those who are loaded with stocks, bonds and inherited cash.

Think about a tax reform that already is hurting selected local economies around the country and could produce heavy job losses in the years to come.

Think about a tax reform that was proposed with one objective in mind -- shutting down tax shelters -- but turns out to hurt a far wider spectrum of the tax-paying public.

That's what congressional tax experts plan to do when they end their vacation recess next week. They plan to take a hard second look at an issue that is considerably more complicated than many of them first assumed: President Reagan's proposed limitations on deductions for second homes, cabins in the woods, houses at the beach and other "nonprimary" residential properties.

What seemed a "fairly straightforward call isn't so easy when you begin to scrape away the surface rhetoric," one key House committee staff member said.

Rather than simply being a real estate issue, the second-home proposal raises serious regional, economic and national social-policy questions, he said. The House Ways and Means Committee will attempt to sort them all out by mid-September, when its members sit down to craft the House's version of the 1985 tax-reform legislation.

One of the major problems Congress is finding with the president's proposal is its "lean" toward affluent families at the expense of middle-income families.

When fully phased in, interest deductions on second-home properties and other consumer purchases would be limited to $5,000 a year, over and above a taxpayer's "net investment income" -- stock dividends, interest on bank deposits, bonds, royalties and rents, minus any attendant expenses such as brokerage fees, taxes and the like.

A family with little or no net investment income would have a new tax problem under the plan: Its combined deductible interest on such items as automobiles, a cabin at the lake, furniture and other consumer purchases would be limited to $5,000 a year.

Wealthy families, by comparison, wouldn't feel the Reagan pinch at all. A family with, say, $20,000 in net investment income would have a $25,000 ceiling on its mortgage interest deductions for a new second or third home -- a limit generous enough to allow undiminished federal tax deductions for a place at the beach and a ski condo to boot.

Congressional critics say the Reagan plan would strike squarely at the economic group that owns the bulk of the nation's recreational and second-home properties.

Middle-income families -- not the wealthy -- form the largest group of second-home owners, according to national survey data provided to the Ways and Means Committee. The average owner of a nonprimary residence had a household income at the time of purchase of $37,900 and has a current household income of $47,000, according to a study commissioned by the American Land Development Association, a second-home industry trade group.

The potential impact of the Reagan plan on local economies of key states also is giving congressmen pause. Commissioned studies predict declines of between 14 and 35 percent in construction of second-home units under the tax plan during the coming decade. They say upwards of 15,000 full-time construction industry workers would lose their jobs, and the Treasury would lose more than $900 million in net annual tax revenue.

For rural, resort-dependent economies in many parts of the country, new tax disincentives for second homes could have severe "multiplier" effects that ripple through the areas for years, economists say, harming small and large retail stores, school-system revenues, service jobs and, eventually, the permanent population base.

The question that the Reagan plan begs is "how much economic dislocation and social-policy change should we stir up in the name of reform?" noted an aide to one congressman.