by James A. Bacon

Between loan guarantees, tax breaks and outright subsidies, the federal government exerts a $450 billion-a-year influence over American real estate markets. Smart Growth America proposes eliminating about $40 billion in federal largesse, reinvesting $7 billion a year in targeted programs to help renters, first-time home buyers and infrastructure investment, and… get this… devoting some $33 billion to deficit reduction!

More than 50 federal programs impacting real estate markets have accumulated over time, said Geoff Anderson, CEO of the Washington, D.C.-based Smart Growth America (SGA), in a conference call this morning. The challenges facing the country have changed considerably since most of them were created. “No overarching principles guide these programs. It’s clear that we can do better.”

In “Federal Involvement in Real Estate: A Call for Action,” SGA proposes reaping $378 billion in cost savings over 10 years by capping the mortgage interest deduction at $500,000 instead of $1 million in mortgage value, and by cutting the capital gains exclusion on real estate from $500,000 to $250,000. Another $8 billion could be trimmed from the National Flood Insurance Program over 10 years, $2.5 billion by capping Federal House Administration loan guarantees over five years, and more by tweaking the Low Income Housing Tax Credit and the Rehabilitation Tax Credit.

In their place, SGA would:

• Establish a pre-tax Mortgage Savings Account, akin to a Medical Savings Account, to help first-time home buyers build a down payment.
• Refocus Federal Housing Administration loan guarantees to “those most in need.”
• Expand the low-income housing tax credit to encourage the private sector to build more affordable housing.
• Expand the Rehabilitation Tax Credit from buildings built in 1936 or earlier to all buildings 50 years or older.
• Provide low interest loans or loan guarantees to developers required to make big infrastructure investments in order to advance their development projects.

There is a smart-growth sub-text to these proposals, and Christopher Leinberger, a developer and president of LOCUS, an SGA-organized network of real estate developers and investors, spelled them out. Current federal programs support the building of single-family houses, typically in auto-centric suburban communities, he said. But there is unmet market demand for what he calls “walkable urbanism,” most of which will come from re-developing existing neighborhoods. “Today’s programs support single-family homes over all other types … and fail to support existing neighborhoods.”

Noting that the U.S. Senate and House of Representatives have begun talking seriously about tax reform, Anderson said that now is a good time to pursue the idea of restructuring the tax code as it affects housing and infrastructure. “This is the beginning of an incredibly important conversation.”

Bacon’s bottom line: We’re all accustomed to special interest groups pleading for subsidies and tax breaks. What’s unusual about these proposals is that the SGA actually proposes cutting programs, too.

The mortgage interest deduction and capital gains exemption are good places to start hacking. Those tax breaks provide a boost to upper-income households that own big houses, take out bigger mortgages and itemize deductions. Why on earth are we using the tax codes to subsidize the lifestyles of the rich and famous? I have nothing against rich people. Indeed, I favor restructuring taxes to reduce their top income tax rates. But I certainly don’t believe in underwriting their extravagances.

The purpose of the mortgage interest deduction is to make housing affordable to first-time home buyers, on the grounds that home ownership promotes socially beneficial habits and behavior. As a matter of principle, I  favor eliminating all tax breaks and subsidies. I can think of nothing that would benefit Americans, rich and poor, more over the long run than achieving a balanced budget. But, if you’ve got to hand out goodies to people, the SGA proposals seem carefully targeted and modest in scope.

(Full disclosure: SGA is a sponsor of Bacon’s Rebellion.)