By every indication, the US economy is strong. Unemployment is low, productivity is up and interest rates have allowed American homeownership rates to grow to their highest point in history.
Yet, despite this seeming prosperity, we are a nation on the verge of going broke. First, collectively, as a nation, then, unless MacGyver comes up with an ingenious plan, many of us will also see the equity in our homes eroded as well.
The Federal Government, like many state and local governments, is desperately in need of money. A lot of money. A whole lot more money than any of them know how to come up with any time soon.
We can debate the rightness of going to war, but we cannot deny its cost. The current estimate, according to the Congressional Research Service, of $570 billion is money we simply do not have. Much of our prosperity is being diverted to further our geopolitical interests around the globe.
According to the Overview Of The President's 2006 Budget, the shortfall for 2004 was $521 billion and projected to be $427 billion for 2005.
There is no plan for covering the annual shortfall, only reducing it. The plan is to cut the shortfall to about $250 billion by 2009.
Social Securities' unfunded obligations total more than $10 trillion, and that figure grows by hundreds of billions of dollars with every year of inaction.
The trade deficit is running at an annual rate of $718 billion and escalating dramatically. Last year it was $617.6 billion.
We cannot afford a decent health care system and the Pension Benefit Guarantee Corporation, which has been forced to shoulder the responsibility for more and more pension funds looted by corporate raiders, is already short $22.8 billion. Uncle Sam is running out of borrowing power to cover that annual revenue shortfall.
It's only a few hundred billion here, and a few hundred billion there but, after a while, it adds up to real money.
To address the problem, the President's Advisory Panel on Federal Tax Reform was appointed and quickly realized the obvious, there isn't any significant money left, except for the $10 trillion of equity Americans have in our homes. And, it's just too much money to ignore.
Among their proposals, is the reduction or elimination of the Mortgage Interest Tax Deduction and changes to Section 121 of the IRS Code, eliminating or reducing the exclusion of capital gains tax on profits from the sale of personal residences.
It's easy to lose sight of what a significant benefit to homeownership these tax breaks have been. Under the old law, section 1034 allowed a homeowner over the age of 55 a once-in-a-lifetime exclusion from capital gain tax on up to $125,000 in profit.
Then, in 1997, President Clinton signed into law the Tax Payer Relief Act, replacing section 1034 with section 121, and the current real estate boom began.
The changes were sweeping and extraordinary. The $125,000 exclusion was raised to $250,000 and to $500,000 for a couple filing a joint return. The eligibility age was eliminated and the opportunity was restricted only by a two year waiting period, meaning that a young couple could possibly earn millions in tax-free profits over the course of their lifetime.
The results speak for themselves. More Americans own homes today than at any time in history.
The housing industry has been the central strength of our economy for several years, creating wealth, fueling business start-ups and paying for college educations -- all of which are in the long-term best interest of our citizens and make us a better, stronger, safer nation.
But now, government spending priorities threaten to do what all the economists and pundits combined could not do, bring down the housing industry, break the backbone of the economy and suck the equity right out of our homes.
These tax laws are two of the key underpinnings or real estate value and, in all likelihood, have been contributing factors in the increase in the value of real estate. If the profits are tax-free, the asset is inherently worth more.
But, the reverse is also true. Significantly alter these tax laws, and values will fall to reflect the value of those tax breaks. Strip away these benefits and most Americans would not be able to afford the homes they currently live in.
This is my message to government, "Don't mess with real estate."
The law of unintended consequences must not be forgotten, nor the Depository Institutions Deregulation and Monetary Control Act of 1980, The Garn-St. Germain Act of 1982 or the retroactive Tax Reform Act of 1986.
The unintended consequences of these combined acts were a bitter recession and a virtual nationwide decline in home owners' equity. By the time the Resolution Trust Company had auctioned it all off in 1995, $621 billion in American's assets were gone and tax payers picked up another $500 billion in costs. Where did the money go? Judging from the evidence presented against the legendary Charles Keating, the king rat of S. & L., looters, booze, drugs and hookers seem to have gotten most of it.
Not only did those actions deflate the equity in people's homes, but jobs were lost and lives were ruined, and people continue to fear a similar occurrence today. However, it won't be speculators causing the collapse, but legislation.
So, whenever I hear someone say that it will never happen, I remember those images of Keating being frog-marched out of the courtroom in leg-irons and thinking, "There goes the poster boy for unintended consequences."
Still, many claim that changing the present code regarding real estate would be political suicide because, in addition to stripping equity from real estate values, the move would also cause the economy to implode.
But, the amount of money that Americans have created in their homes is so great that a bankrupt government might ultimately sense that it has no better choice.
They've already quantified the amount of money and begun the campaign to divide the nation on the issue by casting it as one in which the rich get all the benefit. And, as homes are dramatically more expensive in coastal regions, the country can be further divided geographically into coastal and inland factions.
Read between the lines of one of the Tax Panel's early defenders and there is reason enough to be afraid. Maya MacGuineas of the New America Foundation writes, "Homeowner tax breaks are breaking the budget."
And, to think that I once naively believed that it was overspending by the federal government, corporate looters, too many wars and a huge trade imbalance that were breaking the budget.
She goes on to say, "The money involved is astronomical … The mortgage interest deduction funnels $76 billion to homeowners."
How does keeping your own money become a funnel to you?
Then she graduates from propaganda to outrageousness when she declares, "By giving deductions and exemptions, the government 'spends' part of its potential revenue for everything from housing to education and child care."
Viewed from that perspective, every dollar of your money, which you earned from working, is viewed as potential revenue that the government could put to better use, but not for the fact that we are selfishly blowing it on housing, education and child care.
I'm not feeling it. Where do I go to drink the Kool-Aid that will allow me to think that enriching crooked congressmen is a better use of my money than providing for my family? It's almost scary.
We must not be complacent and assume that the feds would not have the audacity to simply shove this legislation down our throats as they have done so frequently in the past.
If altering the present tax code doesn't bridge the gap, the Federal Government is already preparing for other ways to tap into our home equity. Such as taking federal control of real estate transfers away from the states and supporting it with a transfer or value added tax.
Numerous government agencies are currently poking around in the real estate industry at the state level, despite the fact that consumers seem to be far more concerned about the cost of prescription medicine, cell phone plans, basic cable and cereal according to a survey cited in CNN/Money.
It's just too much money to ignore and that is why a strong citizen response will likely be needed to defeat these proposed changes. Fortunately, according to the results of a recent nationwide survey, voters strongly support current tax policy regarding real estate.
This might be the issue that breaks Americans out of their apathy and causes a revolt to regain control of an arrogant and overspending government. Tea, anyone?
George W. Mantor, known as the "Real Estate Professor" for his consumer education show on AM 1000 KCEO Keepin' It Real ("real talk about the real thing. Real estate!"), possesses over 25 years in the industry. Mantor is the founder, president, and CEO of The Associates Financial Group Inc., an independent, locally-owned, full service real estate and mortgage brokerage, headquartered in Carlsbad, California, and is dedicated to developing long-term relationships with clients .
