The American Homeowners Grassroots Alliance (AHGA) is a nonpartisan consumer advocacy organization serving the approximately 70 million American Homeowners. AHGA focuses on economic issues that have a significant impact on homeowners and home ownership. Tax reform clearly meets those criteria.

As our economy begins to recover, the stimulus programs that were necessary to prevent an economic disaster can be withdrawn. That will significantly reduce the growth of the federal budget deficit. As we look towards that day, it is also important that we do not initiate new policy actions that would continue to add to the deficit. Such steps would be inflationary and limit the ability of the economy to recover. A healthy economic recovery is essential if we want to begin reducing the federal deficit.

These factors and the weak condition of the current economy should be a major consideration in evaluating tax reform options. They argue for a balanced approach to tax reform, in which any new tax cuts are offset by tax increases of an equal amount. Accordingly, our recommendations focus on new tax cuts that we believe will most effectively contribute to economic recovery and tax increases of the same magnitude that will have the most minimal adverse impact on our short and long term recovery.

Recent temporary tax credits have had immediate and positive stimulative effects on our economy. The cash for clunkers tax credit resulted in a substantial increase in auto sales in the U.S. Those sales have enabled U.S. auto manufacturers and foreign-owned manufacturers with U.S. plants to avoid layoffs of many American workers and clear substantial unsold inventory. The cash for clunkers tax credit has also given embattled U.S. auto manufacturers breathing room to restructure their operations. It has enabled many consumers to purchaser more fuel efficient vehicles, which benefits the environment as well.

Though its impact is less visible, the first time home buyers tax credit, which expires on December 1, 2009, has had an even more important impact. The subprime mortgage crisis was the most significant causal factor in a recession that has required the federal government to commit close to $1 trillion in stimulus programs in order to avert the very high risk of a far more adverse economic outcome.

As a result of the first time home buyers tax credit an estimated 350,000 additional home buyers purchased a home this year, helping to slow the continuing growth in foreclosed homes and slow the continuing decline in home values. Without it, huge amounts of additional home equity would have evaporated and foreclosures would be substantially higher. Foreclosures are expected to continue to increase to an eventual 7 million, and we believe that such a huge number of large nonperforming loans continues to pose a much greater threat to the financial services sector and the economy than most economists recognize. This tax credit has thereby helped avert a second mortgage meltdown.

Like the cash for clunkers tax credit, the first time home buyers tax credit has also had an additional benefit for American home buyers and sellers. It has enabled 350,000 more home sellers to sell their homes than would have absent the credit. Some are home builders, and those new home sales create jobs. Many of them are existing homeowners and move up buyers who have in turn enabled more upstream sales. It has helped other sellers who needed to sell their homes to move to new jobs in other areas, or who had to sell their homes because of job losses or other circumstances.

Home equity is the single largest source of retirement savings for most homeowners. Home buyers who took advantage of the credit got a head start on that process, which will increase the likelihood that they will be able to afford a comfortable retirement, and reduce the likelihood that they may be in need of federal safety net programs in later years.

Because tax credits have proven to be effective tools for economic stimulus, and because the economy is still frail, we suggest that selected tax credits be the primary focus of the Tax Subcommittee’s recommendations.

Why not just let home prices continue to keep dropping to whatever floor they would seek without the credit? Because home values would plummet even faster without the credit’s extension, and that would cause another huge spike in foreclosures as even more homeowners found themselves underwater. As a result, million more hardworking homeowners would face the evisceration of a lifetime’s worth of home equity savings due to job losses or other temporary income reductions. Lenders will choke even more on a growing portfolio of nonperforming loans, and we’ll be right back at the point where this recession began. For these reasons this credit should be extended, because if we don’t the economic costs will very likely be far greater and far reaching than its $16.7 billion cost.

The credit’s extension will hopefully stop or substantially slow further erosion in home values until such time as the predicted jobless economic recovery eventually restores jobs and normal economic housing demand for homes. When that happens we will have restored housing demand equilibrium, and home values will return to their historic long term modest appreciation that has enabled home equity to serve as the single largest source of retirement savings for most homeowners. At that point the credit will no longer be necessary.

The Tax Subcommittee should also look for other innovative and multitasking tax credits that will contribute both to short term economic stimulus, long term economic growth, and hopefully other worthy national objectives. The Administration has supported tax credits for improving home’s energy efficiency, as well as over $7 billion in stimulus funding to expand high speed broadband availability. The former creates jobs and helps the environment. The latter also creates jobs, facilitates long term growth, will help reduce the growing digital divide, and will help the environment by enabling the expansion of teleworking. It also facilitates telehealth applications and online education, and offers a host of other benefits.

We propose a new tax credit that would create jobs by driving broadband demand, reduce pollution by expanding teleworking, and facilitate telehealth applications, online education, and a host of other broadband benefits. An example of a successful tax credit that it might be modeled after is the $2,000 hybrid vehicle tax credit, which has helped reduce auto pollution.

If we can provide a $2,000 tax credit to purchase a more fuel efficient vehicle, shouldn’t we also consider a similar $2,000 tax credit to encourage homeowners and other consumers to leave their cars in the driveway and telecommute or establish home-based technology oriented businesses? The credit would be used to purchase the hardware, software and/or necessary broadband connections, and would be available to individuals or businesses than paid for the necessary products or services. It would make sense to also extend it to those who require broadband for health-related or educational services. This would make telehealth applications affordable for many of the chronically ill and to college students who couldn’t afford college campus costs.

The question is how to pay for extending the home buyers tax credit and creating a new teleworking/telehealth/telelearning tax credit. We do not believe that it is advisable to raise taxes on couples earning less than $250,000 year or raise business taxes because of the frail economy. That leaves only those making more than $250,000 as a potential base for offsetting new taxes.

We believe that the benefits of the aforementioned tax credits substantially outweigh the downsides of increasing taxes on those earning more than $250,000. Marginal tax rates in the mid twentieth century were as high as 90%, which was an unfair and confiscatory tax rate. Since then individual income tax rates have been reduced and deductions expanded very substantially.

Congressional Budget Office data shows that in 2005 the top 10% taxpayers had average incomes of $339,100 and paid an effective federal income tax of 16%. For the top 5% the average income was $520,200 and their effective federal income tax rate was 17.6%. For the top 1% the average income was $1,558,500 and their effective federal income tax rate was 19.4%.

This is not an onerous level of taxation for these levels of income and compares favorably to the effective rates paid by high income individuals in other developed countries. A new higher individual income tax rate should also be considered for those with annual incomes of more than $1 million. In the interest of fairness, the maximum marginal rate should be kept under 50%, which would also assure that all but the very, very rich would continue to pay substantially less than half their income in federal taxes. The exact rate of the new and higher marginal individual rate should be governed by the revenues required to pay for the aforementioned tax credits.

In order to prevent a substantial risk of another economic meltdown we must extend the home buyers tax credit in some form. A new teleworking/telehealth/telelearning tax credit offers multiple broad based benefits to a large segment of the population. Paying for these tax credits by increasing the marginal individual income tax rates on individuals earning more than $250,000 per year has relatively few downsides, and the benefits of these two tax credits clearly far outweigh them.

We appreciate the opportunity to provide these suggestions for your consideration.