Tax revenues are pouring in to Washington. Through May, tax receipts were up 7.5 percent from one year ago. By September, the end of the current fiscal year, a cool $3 trillion could be collected – a record high – and a jump from $2.77 trillion collected last year.
Federal spending is down by 2 percent. The decline is driven by cutbacks to National Defense, which spent 6 percent less compared to the prior year.
Even with the massive revenue influx and spending reduction, the federal government will still have spent more than it collects. Total spending is projected to be $3.4 to 3.5 trillion, resulting in $400 to $500 billion in deficit. Because of the annual deficit, the overall cumulative debt still rises. However, due to a larger economy, the deficit as a percentage of GDP will be around 3%, the lowest since 2008.
Revenues from individual income tax are up by 3 percent from this time last year, while revenues from corporations are up by 16 percent. NAR estimates that about 80 to 90 percent of all personal income taxes are paid by homeowners. Therefore, any changes to mortgage interest deduction, as some in Congress are suggesting, will result in a heavier burden to those who already pay a huge bulk of taxes.
Revenue increases are coming from a steadily improving economy. More jobs mean more taxpayers. Also, some in the very high income bracket are now paying a higher tax rate.
With the deficit shrinking in relation to the GDP, there should be less pressure to take away the important tax benefits for real estate. Among those that were in discussion were the mortgage interest deduction, the capital gains tax exclusion from a home sale, the depreciation allowance for commercial real estate, and the 1031 exchange tax deferral. A healthy economy depends on a healthy real estate market. Let’s make sure elected officials do not dare go against the wishes of the people.
Very weird taxes have at times been introduced, going directly against the wishes of the people. During the brief period when England did not have a royal family, after the King’s decapitation by Oliver Cromwell, this extreme puritan dictator introduced a tax on cursing. But it was done on a graduated scale so that the poor English barely paid this tax while the high-income gentile class faced a huge fine. So the poor people could always relieve their feelings while the rich were left frustrated. Perhaps this is why the gentlemanly class of the British still appear stiff and display uptightness.
Lawrence Yun is Chief Economist and Senior Vice President of Research at NAR. He directs research activity for the association and regularly provides commentary on real estate market trends for its 1 million REALTOR® members.