$100,000 in Remodeling=Nine Tenths of a Full-Time Job

May 12, 2014

In addition to benefitting those who live in remodeled homes, remodeling also has the ability to stimulate the U.S. economy. The latest estimates released by NAHB show that spending $100,000 on remodeling generates about $48,000 in wages and salaries in the U.S., which translates to .89 of a job measured in full-time equivalents (enough work to keep one worker employed for a year).

Much like the impacts of new construction, a substantial share of the wages and salaries goes to construction laborers—those who actually install cabinets, replace windows, renovate bathrooms, etc. But the effects are broader. Every $100,000 in remodeling also supports one tenth of a full-time job in firms that manufacture building products, slightly more than that in firms that transport or store or sell those products, and about half that in businesses that supply design, accounting and other professional services to remodelers and their customers.Remod Jobs In addition to wages and jobs, it can also be worthwhile to look at profits generated for business proprietors. Many remodelers and especially their subcontractors are relatively small businesses and self-employed, so in the technical sense they don’t have jobs or earn wages, although that’s the way casual observers no doubt think of them. In the construction industry, the roughly $13,000 in profit that $100,000 in remodeling generates for mostly small businesses proprietors is more than 40 percent as large as the $30,000 generated in wages and salaries.

The wages and profits earned in the course of remodeling are subject to a variety of taxes and fees. The national impacts of $100,000 spent on remodeling also include $21,844 in federal taxes and $7,935 in fees and taxes imposed by state and local governments, for a total of $29,799 in revenue for governments at all levels.Remod TaxesThe government revenue includes a permit fee equal to 1.25% the cost of the remodeling project, the percentage based on conversations between NAHB’s Economics and Housing Policy staff and NAHB Remodelers. For other assumptions and more details about the methodology used to derive NAHB’s national impact of remodeling estimates, please consult the full report, published online as a Special Study in HousingEconomics.com.


Jobs Created in the U.S. When a Home is Built

May 2, 2014

In an article published the first day of this month, NAHB released new estimates of the impact that building single-family and multifamily homes has on the U.S. economy. The new estimates show that building an average single-family home generates 2.97 jobs, measured in full-time equivalents (enough work to keep one worker employed for a year).

A substantial share of this is employment for construction workers. But also included is employment in firms that manufacture building products, transport and sell products, and provide professional services to home builders and buyers (e.g., architects and real estate agents). A breakdown by industry is shown below, along with the wages and business profits generated in the process.Single-familyWages and profits are subject to a variety of taxes and fees. The national impacts of building an average single-family home include $74,354 in federal taxes and $36,603 in state and local fees and taxes, for a total of $110,957 in revenue for governments at all levels.

The article also shows equivalent estimates for building an average rental apartment, including 1.13 (full-time equivalent) jobs, with a breakdown by industry as shown below.MultifamilyEstimates of wages and jobs garner the most attention, but in industries like construction and real estate it can also be worthwhile to look at profits generated for business proprietors. Included in this category are many construction subcontractors and real estate brokers with relatively modest incomes, who are organized as independent contractors and therefore not technically counted as having jobs—although casual observers no doubt tend to think of them that way.

The impacts of building an average rental apartment include $28,375 in federal taxes and $14,008 in state and local fees and taxes, for a total of $42,383 in revenue for governments at all levels. For more details and assumptions used to produce the above estimates, consult the full article.

And keep in mind that these are national estimates, designed for use when the impacts on suppliers of goods and services across the country are of interest. Avoid trying to use national estimates to say something about impacts at the state or local level.  For that, keep referring to NAHB’s Local Economic Impact web page.


The President’s Budget: Housing-Related Proposals

April 10, 2013

The President’s Budget includes policies that, if enacted, would have impacts on the housing market and home builders, including a number of tax increases.

While the budget proposal is not a legislative proposal that the Congress will consider in full, the set of policies contained in the document do represent a wish-list for the administration. And with tax reform discussions underway within the House Ways and Means and Senate Finance Committees, it worth examining the proposals submitted by the President to Congress.

Overall, the president has endorsed revenue neutral corporate tax reform, which would involve eliminating certain tax credits and deductions for C Corporations and reducing the applicable corporate tax rate. Such an approach would leave taxes on pass-thru and sole proprietorship income unchanged. Many in Congress, including Chairman Dave Camp of the Ways and Means Committee, have rejected this approach and are working toward tax reform involving both the corporate and individual sides of the tax code.

The President’s proposal also includes a change to how inflation is calculated for both entitlements and income tax brackets. This chained CPI definition reports a smaller increase in inflation than the traditional CPI approach because it allows for greater consumer substitution among goods. This methodological change is estimated to reduce deficits by $230 billion over ten years through a combination of reduced (projected) government spending (Social Security) and income tax bracket creep.

All in, the budget proposals would purportedly reduce deficits by an additional $1.8 trillion, bringing total deficit reduction to more than $4 trillion when combined with other efforts from the last two years. Estimating an exact scorecard is difficult however due to varying baselines and how to account for declines in spending due to such items as reduced costs for military expenses.

 

Tax Proposals

28% Cap on Certain Deductions, Exemptions and Exclusions

Proposed in prior year budgets in more narrow forms, this proposal would limit the tax value of certain tax expenditures for taxpayers paying more than a 28% marginal income tax rate. In particular, the proposal would limit the value of the mortgage interest deduction and real estate tax deduction for homeowners, particularly in high cost areas, for taxpayers with adjusted gross income of more than $223,050 ($183,250 if single). The cap would apply to all itemized deductions.

Additionally, the proposal would tax in part currently tax-exempt items such as tax-exempt bond income (including multifamily tax exempt bonds) and the employer-paid health insurance exclusion and self-employed health insurance costs. Certain “above the line” deductions, such as moving expenses, would also be subject to the cap.

Finally, small businesses, including home builders and remodelers, who claim the section 199 domestic activities deduction would also face potential tax hikes in the form of the 28% cap. It is worth noting that section 199 is available for both corporations and pass-thru/sole proprietorships, and this proposal would only affect the non C Corporation businesses, who tend to be smaller enterprises.

This proposal is estimated to raise $529 billion over ten years.

Carried Interest

Despite being associated with hedge funds and private equity, this proposal would also have an impact on the multifamily sector, where the use of carried interest is a common financing mechanism to attract equity for the development of residential rental property. The proposal would require capital gain income from, among other items, sale of multifamily property to be taxed at ordinary income tax rates when the share of gain from the sale earned by the taxpayer exceeds the share of equity originally invested by taxpayer.

The proposal is estimated to raise $16 billion over ten years.

Debt Forgiveness for Principal Forgiveness

The proposal would extend from the end of 2013 to the end of 2015 the tax exclusion for forgiven or cancelled mortgage debt associated with a principal residence. This tax exclusion, in place since 2007, has facilitated short sales and certain debt workouts.

This proposal reduces federal tax receipts by $2.6 over ten years.

Small Business Section 179 Expensing Extended

The proposal would extend for 2014 and beyond the 2013 small business expensing rules. These rules include a $500,000 expensing deduction limit and a phaseout of the allowance beginning at $2 million of qualified investment.

This proposal reduces revenues by $69 billion over ten years.

Buffett Rule

The proposal would impose a new minimum tax of 30% on adjusted gross income reduced by a maximum 28% deduction for charitable giving. The rule would begin to apply on incomes of $1 million and be fully phased-in at $2 million. Ordinary business expenses would remain deductible.

This proposal raises $53 billion.

Independent Contractor

The proposal would repeal the Section 530 of the Revenue Act of 1978 rule protecting independent contractor status. The proposal would allow the IRS to issue new regulations dealing with the independent contractor versus employee classification using common law tests.

The proposal is estimated to raise $9 billion over ten years.

Contractor Reporting and Withholding

The proposal would require a business to verify the taxpayer identification number (TIN) with the IRS for all contractors receiving more than $600 in a year. If the contractor failed to provide a valid TIN, the business would be required to withhold a flat rate of taxes on the payments made to the contractor.

The proposal is estimated to raise $1 billion over ten years.

Energy Efficient Commercial Building Deduction

Under present law, the section 179D energy-efficient building deduction is available to commercial and multifamily properties (apartment buildings of more than three stories above grade). The proposal would reform the 179D tax rule to promote its use and achieve energy efficiencies for existing commercial and multifamily properties. Among other changes, the per square foot deduction amount would be increased to $3.

The proposal would reduce federal tax receipts by $5 billion over ten years.

Estate Tax

The proposal would reinstate the 2009 rules regarding the estate tax, including increasing the tax rate from 40% to 45% and reducing the exemption amount from $5 million to $3.5 million.

The proposal would raise $71 billion over ten years.

Low-Income Housing Tax Credit

The budget proposal includes a number of changes intended to improve the effectiveness of the LIHTC program. These changes include a small increase of rate to the 70% present value credit (which absent the temporary 9% rate floor would fall to 7.43%).  The proposal would change the formula producing a rate closer to 7.9%. The proposals would also allow certain income averaging for tenant requirements, allow states to convert some amounts of unused private activity bond cap for LIHTC credit use, and make changes that would permit REITs to invest in LIHTC partnerships.

Together these proposals reduce tax receipts by $1.4 billion over ten years.

 

Other Fiscal Policy Proposals

 

Streamline HARP to Allow for Additional Refinancing

The proposal calls for legislation to modify the HARP program to increase access and lower costs to allow refinancing of mortgages that are not backed by the GSEs in order to reduce monthly costs for underwater homeowners.

Neighborhood Stabilization Efforts

The budget provides funding for rehabilitating, repurposing, and demolishing vacant and blighted properties. In addition, the budget includes funding to support public-private land banks, provide grants to areas with high-levels of vacancies or severe blight, and offer loan subsidies to stimulate private investment.

HOME Program

The budget reduces funding for the HOME program by 5% relative to 2012 levels.


Who Claimed the Energy Efficient Improvement Tax Credit?

August 25, 2011

In 2009, the rules for the tax code section 25C $1,500 energy-efficient improvement tax credit and the uncapped 25D 30% tax credit for home power production equipment tax credit were significantly expanded. The 25C credit is used to improve existing primary residences by installing energy-efficient windows, doors, roofing, and some home property like water heaters. The 25D credit, which rewards homeowners for installing solar panels, geothermal heat pumps, small wind turbines and fuel cells, can be used in existing homes and new construction.

The result of the 2009 policy change was a significant increase in the use of these tax credits, which led to remodeling activity and job creation. And we now have 2009 IRS data that allows tracking where the credit was claimed. The results indicate that while the largest states, in terms of homes and population, witnessed the largest tax credit claims, there was also geographic clustering of credit claims on a per taxpayer basis.

The map above tracks the number of taxpayers in each state that claimed either or both the 25C and 25D tax credit, although NAHB estimates that most of the claims were 25C related. Intuitively, larger states in terms of population had larger numbers of taxpayers claiming the credit.

In the next map, a slightly different picture emerges. This map presents the percentage of taxpayers in each state who claimed either or both the 25C and 25D tax credits in 2009. A clear concentration of tax credit use can be seen for states in the northeast and upper midwest. Why?  There are two leading explanations. First, homeowners in states in cold weather climates have more to gain from energy-efficient improvements in terms of reduced utility bills. However, there is no reason to believe that warm weather homes could not also benefit from energy-efficient improvements.

Thus, the second explanation, and the stronger one in my opinion, is that the states with relatively more common use of the energy tax credits also contain older homes. The following map details the median year of construction for housing units in each state, and there is indeed a rough correlation between tax credit use and older housing with concentrations of both in many northern states.

A homeowner with a 50 year-old home is much more likely to improve their residence than a homeowner who has purchased a newly constructed home, with new construction more common in the southern part of the nation.

The last map tracks the total amount of the tax credits claimed.  Overall, in 2009 taxpayers claimed nearly $5.9 billion in 25C and 25D tax credits, with a breakout between the two credits not yet been provided by the IRS. In general, NAHB estimates that there were many more taxpayers claiming the 25C credit, but the average amount of the 25C credit was significantly smaller than the uncapped 25D tax credit. For the two tax credits combined, fully 93% of tax credit claims were made by taxpayers who have an adjusted gross income of no more than $200,000, which is indicative of a middle class tax program.

The net economic impacts of these tax credit programs are also clear.  The following chart plots new home sales (right axis) and total remodeling expenditures (left axis). The data indicate that remodeling expenditures fared better over the 2008 through 2010 period than new home sales.In fact, it is quite reasonable to believe that the “bump” remodeling activity seen at end of 2009 and the beginning of 2010 was directly due to the improved 25C and 25D rules.

While the 25C credit, along with the 25D credit, were helpful in creating and sustaining jobs in 2009 and 2010 in the residential and home building sector (every $100,000 in remodeling activity creates about one full-time job), the tax credit was significantly weakened for 2011. For more information on the current tax credit rules, please see the NAHB factsheet on both the 25C and 25D programs.


New NAHB Report on Effective Property Tax Rates

August 9, 2011

Building on previous research examining effective property tax burdens on owner-occupied homes by state and metropolitan areas, NAHB economist Natalia Siniavskaia has published a new paper reporting effective property tax rates by county and census tracts.

The research should be useful for prospective homebuyers and businesses in the housing industry interested in comparing effective property tax payments across narrowly defined geographic areas.

An “effective property tax rate” is simply the amount of property tax paid divided by the value of the home, thus giving an apples-to-apples comparison of true tax burden for homes in various locations. The alternative to an effective rate measurement is to compare statutory tax rates, which can be misleading given differences in assessment rules, tax credits, and other complicating factors.

The report presents tables of effective property tax rates for more than 3,100 counties, mapped above, and also discusses factors that help explain differences in those rates. It finds that effective property tax rates often appear to be related to household income, the value of homes in the area, and how recently those homes have been sold.

The data reveal wide differences across counties, with median real estate taxes ranging from around $110 per home in several Louisiana parishes to more than $8,000 per home in Hunterdon County, N.J., and in Nassau and Westchester Counties in New York. Similarly, real estate tax rates display a wide range of values, from less than a dollar per $1,000 of value in two Alaska Census areas to around $30 per $1,000 of value in several New York counties.

Drilling the data down to the smaller geographic confines of Census “tracts” — small subdivisions of a county with populations between 2,500 and 8,000 — the data show that even within counties, effective property tax rates can vary significantly. As expected, a large portion of inter-tract differences can be explained by their regional location, with tracts located in the Midwest, Northeast and Texas paying considerably higher property tax rates per $1,000 of value, compared to tracts in the South and West regions.

As the report notes, this is a reflection of a well-known and long-established tradition in which southern states tend to rely less on real estate taxes as a source of government revenue.

As we have noted before, despite dramatic declines in housing values, homeowners continue to pay about the same nominal level of property tax payments, thus leading to higher effective tax rates. This is due to lags in accruate assessments by taxing jurisdiction, but also out of necesssity due to declining sources of state and local tax revenue during the recession.