From making significant changes to the tax code to nationalizing the California independent contractor rules, the Biden administration has many legislative proposals embedded in their plans that could have a material impact on housing markets and brokerage.
I don’t claim to be an expert in any of these. I would like to give credit to those who likely spent much more time analyzing their impact. Here are a few thoughts.
The award of cash allowances to first-generation homebuyers sounds like a very useful program. This would assist lower income, first-time buyers to have a better chance to enter the homeowner-ship ladder which history has shown to be strongly correlated to future wealth of a household. The challenge, as we have commented elsewhere, is that we do not have a demand problem. The issues are on the supply side. While this proposal is both targeted and useful, one wonders how many will benefit.
If the real target is to help low-income, first-generation and first-time homebuyers to get into the market, might a better approach be to underwrite the building and financing of housing targeted at and made available only to these households?
The elimination of the $10,000 limit on the deductibility of state and local taxes on Federal tax returns (SALT) has little to do with improving access to the housing market and mostly to do with easing the loss of high-income households who are departing high-cost, high-tax states. The resulting loss of taxable income in several of these states, due at least in part to the SALT limitations, has begun to have a measurable impact on the financial health of some of these states. The Center on Budget and Policy Priorities issued a report stating that the top 1% of all households would receive 56% of the benefit of such a repeal, while the top 5% of households would receive nearly 80% of all the benefits. The SALT limits are estimated to generate over $185 billion over a 10-year period. Whether an increase in the personal tax rate would offset the decline in repeal is unknown. But it does not appear to have any measurable impact on housing sales or housing values given the increases in average sales prices in the high-cost states that were most affected.
Another proposed change is the repeal of the 1031 exchange section of the Federal tax code. According to various studies I’ve reviewed, such a repeal or limitation would affect a large segment of transactions — mostly high-tax states — and would raise the cost of capital and debt burdens on an important segment of the investment market. Some studies suggest that this legislative proposal would have a minor effect on GDP and tax revenues, but it’s uncertain what the true impact of such a change would be. Clearly, it may impede some investment activity in this segment of the market and raise the cost of such investing for a certain segment of real estate.
There are several respected economists who view the $1- $2 trillion proposed infrastructure package as being pro-housing. Part of the legislative proposals call for the rehabilitation of 500,000 homes in low and middle income areas. Clearly, this part of the bill would be very pro-housing. In addition, another portion of the plan proposes building over two million affordable homes. Were this to be done effectively, then it would have a significant positive effect on the housing market. As we’ve said, demand is not the problem – it is supply – and anything the Federal government can do to stimulate supply is a huge plus for the housing market.
The House has passed a bill called the PRO Act which, among other items, calls for extending the California regulation on independent contractors and is referred to as AB 5. Under AB 5, there are three key tests as to whether a person qualifies as an independent contractor. Failure on any of the three could mean a person cannot be so qualified. Realtors fail at least one and, possibly two, of the tests.
Under the PROAct, this standard would be imposed throughout the country. While California Realtors sought and won an exclusion from this Act, whether other states would prevail in getting excused is another big question. While the AB 5 standard may not have been intended to be used against Realtors, it remains to be seen whether the bill will make it through the Senate and, if it gets through the Senate, will the AB 5 standards survive rewrites or amendments?