Cheat sheet: What tax reform would mean for lenders

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WASHINGTON — The Republican’s tax reform blueprint released Wednesday was largely welcomed by the financial services industry, which would like to see a lower corporate tax rate, but battles lie ahead as Congress looks to hammer out the details.

The plan would lower the corporate tax rate to 20% from 35%, allow businesses to expense new capital investments for at least the next five years and lower the rate on closely held small businesses and S corporations to 25%.

“Today’s announcement is an encouraging step forward in our shared goal of a tax system that delivers higher economic growth, job creation and wages that our country desperately needs,” said Jamie Dimon, chairman and chief executive of JPMorgan Chase and chairman of the Business Roundtable. “Congress must act with urgency on this framework and move the legislative process forward.”

But some expressed concern that the plan would double the standard deduction to $24,000 for married couples and $12,000 for individuals—a move that could dramatically lessen the impact of the mortgage interest deduction, which would be obsolete for many homeowners.

“This proposal recommends a backdoor elimination of the mortgage interest deduction for all but the top 5% who would still itemize their deductions,” said William E. Brown, president of the National Association of Realtors.

“When combined with the elimination of the state and local tax deduction, these efforts represent a tax increase on millions of middle-class homeowners,” Brown said. “That tax increase flies in the face of a reform effort ostensibly aimed at lowering the tax burden for Americans. At the same time, the lost incentive to purchase a home could cause home values to fall.”

For many consumers, the mortgage interest deduction offers the biggest tax benefit because the size of their mortgage is large compared to their overall wealth. The blueprint technically keeps tax incentives for mortgage interest, but by doubling the standard deduction, many homeowners will see no tax benefit from owning a home.

“Although the mortgage interest deduction remains untouched, its effectiveness could be diminished as more families elect to take a higher standard deduction,” said Granger MacDonald, chairman of the National Association of Home Builders. “As the process advances, NAHB looks forward to working with policymakers to mitigate any detrimental effects that this development could have on the housing market.”

Some analysts said housing groups will push back harder as reform moves forward.

“We continue to believe that the mortgage industry could become more forceful in its opposition to this effort as the tax benefit of homeownership could be diluted,” said Isaac Boltansky, an analyst with Compass Point Research & Trading. “Notably, there is continued chatter regarding the potential for a targeted mortgage credit as part of a broader package.”

Others say concerns about the impact on housing are overblown.

“The mortgage deduction is most important the higher one goes in income,” said Karen Shaw Petrou, co-founder and managing partner at Federal Financial Analytics. She said 2014 tax data shows that low- and moderate-income taxpayers used the mortgage interest deduction roughly 55% of the time while higher income taxpayers used it 82% of the time.

She added that the housing interest groups oppose the higher standard deduction because the mortgage interest deduction is a key incentive for buying a home.

“What it does do is to some degree enhance what they portray as affordability so borrowers can get more house,” Petrou said.

Republican lawmakers said they proposed doubling the standard deduction in order to make the tax system simpler for most Americans. House Ways and Means Chairman Kevin Brady, R-Tex., said the system would be “so fair and so simple 9 in 10 Americans will be able to file their taxes using a simple post-card style system.”

Brian Gardner, a policy analyst at Keefe, Bruyette & Woods, said “there’s no easier way to simplify the code than by increasing the deduction.”

It may not have that big an impact as some in the industry fear, he said.

“There’s some evidence that many taxpayers who do not itemize have mortgages and own homes so increasing the standard deduction won’t undercut homeownership as much as some people will claim,” he said.

More generally, the GOP tax plan avoided picking some controversial fights, including on credit union taxation. The banking industry had been hoping that it could use the opportunity of reform to curb or eliminate the federal tax exemption for credit unions, but that idea was not part of the plan—nor does it appear likely to be added.

“The economic value the credit union tax exemption provides to the entire economy is estimated at more than $16 billion per year, and we are pleased to see that appears to be recognized in this framework," said Dan Berger, the president and CEO of the National Association of Federally-Insured Credit Unions.

The plan also preserves the Low-Income Housing Tax Credit, which “is important both for the lower end of the multifamily market and banks that invest in these credits,” Boltansky wrote.

But other battles may be looming, including over a push to tax 401(k) savings plans upfront and not collecting tax when they mature, similar to the workings of a Roth Individual Retirement Account.

The congressional Joint Committee on Taxation estimates that the Treasury could recoup more than $500 billion over the next five years by taxing those savings plans up front.
But that idea was not included in the GOP plan this time around. That doesn’t mean it’s dead, however. Originally put forward by then-House Ways and Means Committee Chairman Dave Camp, R-Mich., in 2014, there is speculation that the idea is percolating among Senate Republicans who are working on the tax overhaul.

“There is significant concerns about taking a Roth approach to 401(k) employee contributions that would reduce contribution,” Harry Conaway, president and CEO of Employee Benefit Research Institute, said at an event sponsored by the Financial Services Roundtable.

Rep. Richard Neal, the top Democrat on the Ways and Means panel, said Wednesday that he would push back against any such provision.

“One of the plans I will certainly oppose is any idea of ‘Rothification’ because I think that would provide a disincentive to set those dollars aside,” Neal said. “We have got to keep the tax incentives for retirement savings.”

While some argue that taxpayers would be less likely to put money aside if those funds were taxed upfront, other studies draw different conclusions.

Financial services companies say that the economy as a whole benefits when there is more money in those savings accounts, which also helps the equity and debt markets. They also argue it has more benefit for taxpayers as they enter the work force and look to build savings.

“This has been a discussion that has been out there for a number of months,” said Robert Reynolds, CEO of Putnam Investments. “I think the pretax [benefit] is so critical for younger medium-to-lower-income workers. I think to even toy with that would be a huge mistake.”

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Tax reform Tax deductions Mortgages Retirement income Roth 401(k) 401(k) Policymaking