Home Building, Sales Are Key to President’s Plan

The economic growth package unveiled in President Bush’s State of the Union address offers only modest tax relief to middle America, and instead places its emphasis on the powerful engine of housing construction and the traditional lure of home ownership to pull the nation out of recession.

Much of the initial attention will no doubt focus on Bush’s initiative to immediately reduce payroll withholding for 90 million American wage-earners and his proposal to increase the personal exemption for dependent children by $500.

But in terms of the potential impact on America’s stalled economy, those broad-based measures are relatively insignificant compared to the President’s proposals for stimulating purchases and sales of homes and providing new tax breaks for development.

“Real estate has led our country out of almost all the tough times we’ve ever had,” Bush said in his address to Congress and the nation Tuesday night. “Once building starts, carpenters and plumbers work, and people buy homes and take out mortgages.”

As a result, the most potent tax breaks Bush is proposing will be aimed directly at the depressed real estate sector of the economy--an assortment of incentives for the ordinary Americans who buy and sell homes and the businesses and investors who finance and build them.

Still, some analysts express doubts about the need for such proposals. While the housing industry remains mired in recession, many economists believe that the recent interest rate cuts by the Federal Reserve Board will do more to buoy home sales than any tax package devised by the White House and Congress.

Economists have been almost unanimous in advising Washington not to embark on “quick-fix” economic stimulus programs that run the risk of increasing the federal deficit and reigniting inflation. The President seems to have heeded that advice by devising a plan to offer some relief while living within the broad outlines of the 1990 deficit reduction act.

At the same time, however, Bush has crafted proposals that are targeted directly at one of the most vocal and affluent segments of the middle class: American homeowners.

Senior Administration officials said that Bush’s real-estate proposals would spur an additional 250,000 home sales each year, in turn creating thousands of new jobs in the battered home building industry. Altogether, the President’s economic package would add at least 500,000 jobs to the U.S. economy over the coming year, Administration officials predicted.

Although the overall cost to the government of the tax cuts included in Bush’s economic package--$24.6 billion over five years--is relatively small in relation to America’s $5-trillion economy, many of those tax provisions will be tightly targeted at the housing sector.

“We have addressed the things that are most important to the American people--their family . . . and home ownership,” said one Administration official. “This package really addresses those issues.”

The plan includes a temporary $5,000 tax credit for first time home buyers, penalty-free withdrawals of up to $10,000 from individual retirement accounts for purchases of first homes, and creation of a new--and potentially huge--deduction for taxpayers who have suffered losses on the sale of their homes in depressed real estate markets.

The $5,000 tax credit, which would be applicable to any homes purchased after Feb. 1, 1992, would expire next January and would be credited in equal increments against taxes in both 1992 and 1993. But Bush hopes to win approval of the penalty-free IRA withdrawals and the deductibility of losses as permanent changes in the tax laws.

The deductibility of home sale losses could prove extraordinarily popular in New England and other areas of the country that have suffered dramatic declines in home values over the past two or three years. The provision also addresses one of the key factors that has depressed consumer confidence throughout the current recession: Falling home prices have made many homeowners feel less secure and less willing to spend and borrow money.

“If you are in a real estate market that has been devastated, this will be a big deal,” said one Administration official said.

The President’s package includes revival of “passive-loss” tax breaks for real estate developers, a temporary accelerated depreciation schedule for real estate and other investments, and new incentives for pension funds to purchase real estate.

In addition, Bush once again asked Congress to approve a sharp cut in the tax on capital gains. Although the tax cut proposal would reduce the effective top rate to 15.4% for a wide range of investment assets, the real estate industry is one of its biggest backers.

The “passive loss” proposal would allow real estate developers to apply their losses on real estate investments against their taxes on profits from other businesses. Some critics contend that a similar provision in effect in the early 1980s contributed to the speculative boom--and subsequent crash--in commercial real estate.

By contrast, middle Americans who do not own their own homes or plan to buy one soon would find relatively little in the Bush package for them.

The $500 expansion of the personal exemption for children under the age of 18--which would be phased out for higher-income families--would provide a minor tax break, tax experts say. For middle-income families in the 28% tax bracket, the expanded exemption would be worth only $140 per child per year. For those in the 15% bracket, the bigger exemption would be worth only $75 per child.

The President’s decision to immediately reduce payroll withholding for 90 million American wage-earners will reduce federal revenues by $25 billion this year and add an estimated $350 to the average American family’s take-home pay over the coming year.

But the withholding change is not a genuine tax cut. Instead, it is a plan designed to give taxpayers money today that they would otherwise receive in the form of tax refunds next year.

Bush also proposed a tax credit of up to $3,750 to help uninsured Americans pay for their own medical and health care insurance coverage.

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