Closing new mortgage 'loophole' would make buying a home more expensive
Guest columnists James Pishue and Marc Gaspard argue against a proposal to apply the state business-and-occupation tax on the interest income lenders earn on first mortgage loans. The tax would make credit harder to get or increase the cost to homebuyers as banks pass it along.
Special to The Times
ACTIVISTS in Olympia are pushing to impose a new tax that will cost homeowners across the state hundreds of millions of dollars. Their plan would impose the business-and-occupation tax on the interest income lenders earn on first mortgage loans for the first time ever in our state.
What activists are calling a "loophole" has been state tax policy for more than three decades ["Let's say 'yes' to our children, 'no' to Wall Street tax breaks," Opinion, April 16]. When the Legislature first imposed the business-and-occupation tax on bank revenues in the 1970s, it purposely excluded interest collected on these loans.
Lawmakers back then recognized that homeownership provides many benefits for Washington families and communities. They chose to encourage it by keeping mortgage interest rates as low as possible.
They also realized that the housing industry plays a key role in our state economy. Hundreds of small- and medium-sized businesses and the craftspeople they employ depend directly on the housing industry. They have been particularly hard hit in the current recession. For our economy to recover, we need to get housing moving again, and that requires demand for homes.
Home loans have relatively low margins compared with other loans. If a new tax were imposed on these loans, banks can't simply eat the additional cost. Some might get out of the business, reducing the supply of credit available to consumers. Those remaining in the market must pass the added costs on to consumers in the form of higher rates for new mortgages and, wherever possible, in re-pricing adjustable mortgages. By making mortgages more expensive, this new tax will weaken housing demand and dampen recovery.
Proponents claim their intent is to limit the impact of this new tax to "big, out-of-state banks," and leave smaller, Washington-based banks untouched. Despite their rhetoric, the structure they propose would impact several significant regional banks with long histories of serving their local communities.
Even if the reach of the new tax were limited to major banks, it would have a significant negative impact on the mortgage-lending environment for many, if not most, Washington consumers. These banks write the majority of mortgage loans in our state. Most borrowers would see higher rates, making it harder to qualify for a loan. This reduces their housing buying power and impairs their ability to spend on other goods and services that fuel our economy and state revenue collections.
Higher costs are likely to spread to customers of smaller banks in coming years. If this new tax is enacted, it will be easy for lawmakers to change the rules to generate more revenue when times get tough. We've seen this pattern of tax adjustments many times, from the federal income tax to the state sales tax.
Many of the people the proponents claim to represent would be hit hardest by this new tax. Larger banks are more likely to offer a wider variety of programs to help borrowers of lesser means, those with less-than-perfect credit histories and first-time buyers qualify for mortgages. Putting these banks at a cost disadvantage is likely to impact these programs and the less-advantaged customers they serve.
Last year, the business-and-occupation tax rate for banks, thrifts and other mortgage lenders was raised 20 percent. Another change in the way these taxes are calculated is expected to cost financial institutions $150 million next year and more than $180 million the year after.
Adding a new tax on mortgage interest income would hurt consumers by making home loans harder to get and more expensive. It's a misguided idea that would slow economic recovery and weaken the long-term economic health of our state.James Pishue, left, is president of the Washington Bankers Association. Marc Gaspard is president of the Washington Financial League.