For municipal housing issuers, “the elimination or reduction of the municipal bond tax exempt would probably be more disruptive than would a change to the mortgage interest deduction,” S&P said in the report released Monday.
“Tax exempt issuers rely on the tax exemption to finance loans at a lower effective rate than would otherwise be possible,” the company’s analysts said in the report. “Without this exemption, financiers of affordable single-family and multifamily loans would have a more difficult challenge meeting the needs of populations that need below-market housing.”
S&P noted, “Homebuyers that receive financing through a municipal source usually have smaller mortgages than the general market and may not have sufficient income or deductions to itemize and use the mortgage interest deduction.”
However, the analytical team, led by primary credit analysis Gabriel Petek and Steven Murphy, said in the report the MID exemption is still a concern.
While “not all households even claim the deduction” and “those that do tend to have higher incomes,” the analysts said in their view, “fallout from reducing the mortgage interest deduction would extend well beyond the direct effects of those individuals who take the deduction.”
The analysts added that “any drag on residential purchases—or on the housing market in general—would dampen the rate of economic expansion to some degree.”
Potential cuts to property tax exemptions also are a concern because they are “the primary source of revenue for most local government operating budgets,” the report noted. “If homeowners scale back on the size and cost of housing, this could lead to lower home values and decreases in property tax revenue.”
While cutting exemptions would be designed to add to federal revenue, S&P analysts said in their view, “not only would this…result in less federal tax revenue, the ostensible purpose behind the change, it would also post a threat to credit quality throughout the state and local government sector.”