APPENDIX IV

The ACRS recovery allowance for structures, adopted in 1981, should not be revised to reduce current depreciation allowances. From an investment point of view, rental housing has often not been attractive. Intensive management is necessary to both maintain

rental housing and to assure a steady income stream. Cost of maintenance of rental property have increased considerably in recent years. In addition, income generated from rental property is lower than for other types of property.

Residential rentals do not generally carry CPI inflation increases, and the income of residents can only support a certain level of rent. Therefore, market rents generally do not create an income stream which is competitive with other types of investments. In addition, rent control in many jurisdictions has kept rents at below market levels.

As a result, residential housing needs to retain current depreciation allowances to be competitive with other types of investments. A reduction in present depreciation allowances would only drive capital away from residential housing at a time when more, not less, capital is needed.

In fact, component

NAHB supported the 1981 ACRS depreciation changes because of their certainty and simplicity. It is, however, a misconception to believe that the changes, in terms of new residential construction, significantly increased depreciation write-offs. depreciation plus the ability to use 200 percent declining balance often created a more advantageous depreciation situation for new housing than the situation after ACRS. The tax savings as well as

Cont. from Appendix IV

Page 2

interest on the tax savings amounted to a substantial sum.

Possible changes in the current tax rules associated with
depreciation allowances for structures would bring uncertainty
into the market place again, thereby diminishing the potential for
future economic growth in this important sector of the economy.

The ACRS changes benefitted other types of assets, particularly equipment, much more than real estate. The effective tax on structures, was relatively unchanged both before and after 1981. This result is confirmed in several places. First, the economic report of the

President, 1982, comments:

...ACRS does not treat all types of business investments
equally. Although favorable to all new investment, ACRS
is relatively more favorable to investment in equipment.
As a consequence, industries for which short-lived equipment
represent a large fraction of their total capital will face
lower effective tax rates than industries with a low equip-
ment-intensive capital structure. (Page 124)

The relative bias of current tax rules toward equipment as opposed to apartment buildings is underscored in a Library of Congress study in 1981 entitled Effects of the Accelerated Cost Recovery System

by Asset Type. The study notes:

there may well be a shift in the composition of capital towards business equipment and away from structures particularly away from residential structures. The relative (and perhaps absolute) size of the housing stock could fall, not only because of the effects on rental housing but also because high interest rates will make owner-occupied housing less attractive and because there are no offsetting tax benefits.

Therefore, as the Committee looks at base broadening approaches, the relatively heavy tax burden on rental housing should be considered. Rather than increasing the tax burden by changing ACRS, the Committee

Cont. from Apprendix IV

Page 3

should look at other avenues for broadening the tax base.

Another aspect of the ACRS that has generated criticism is that used property is treated the same as new property; both are equally eligible for the 15-year ACRS write-off. However, the ACRS is

available for used property only if the persons acquiring the property
did not own it prior to 1981, the year the ACRS rules became effective.
Thus, while sales of existing residential property are possible,
these involve a new set of purchasers and free up the capital of the
former owners that has been locked up in such property. This freeing
up of capital is a positive rather than negative result since the
capital can be channeled into new investment. Moreover, the Treasury
benefits from the capital gains tax that must be paid as a result of

the resyndication.

Concern has also been expressed that the ACRS may be used for property received in a tax-deferred exchange qualifying under IRC $1031. This situation, however, is covered by the comprehensive rules against "churning" provided in IRC $168(e)(4). These rules deny ACRS depreciation for property received in exchange for pre-1981 property in a tax-deferred exchange unless additional debt or cash is made part of the transaction. Even then, ACRS is available only to the extent of the new debt or cash.

TOTAL

72.008

24,003
04.010

$2,400,273

st

10

$489,460

50,515

44,277

106,263

21,333

96,011

34,667

,338

156,010

26.667

13,337

120,014

9,599

0,300

7,196

5,409

4.690

41,433

10,002
9.601
16,002

13,502

10,126

7,595

5,696

60,617
24,001
61,988

$203,193 $209,647 $143,154 $123,310 $100,41681,357,248

959'S

The CHAIRMAN. Dr. Riedy. STATEMENT OF DR. MARK J. RIEDY, EXECUTIVE VICE PRESIDENT, MORTGAGE BANKERS ASSOCIATION, WASHINGTON, D.C.

Dr. RIEDY. Thank you, Mr. Chairman. I'm Mark Riedy. I appreciate the opportunity to be here today. In response to one of your questions, we think the attack on budget deficits needs to begin immediately rather than after the 1984 elections.

This Nation really has been living on borrowed time with respect to the impact of present and prospective deficits on the economy. By that I mean that real and nominal interest rates would be higher than they already are, if it weren't for large corporate profits and cash flows, and relatively moderate long-term capital investment activities which have generated only modest business demands for credit during the current recovery.

We've been lucky thus far, but business credit demands are expected to rise, perhaps substantially in 1984. The results will be upward pressure on interest rates that will slow growth in interest sensitive industries, add to the borrowing cost of the Treasury, and, on balance, worsen the problems of the Federal deficit in the next few years.

The Mortgage Bankers Association of America has been keenly aware of the problems caused by excessively large Federal deficits because of their severe impact on mortgage interest rates and the affordability of home ownership.

In our formal statement we have provided an analysis of this impact on America's potential homeowners that illustrates clearly the long-term damage being done by the effects of the deficit. It is not merely a temporary problem, or a problem of shifting the timing of housing construction and home purchases by short periods, but a lasting shortfall of new construction and an on-going frustration by great numbers of families who are unable to afford to purchase suitable shelter.

Total private housing starts each of the first 4 years of this decade, for example, have fallen far short of the activity levels commonly accepted as necessary to satisfy even a moderate projection of new housing demand.

MBA's board of governors has consistently expressed its great distress regarding the mismanagement of fiscal policy. Initially, the board argued that the top priority had to be extensive cuts in Federal spending, including defense and entitlement programs. Only if spending cuts could not be deep enough to reduce projected deficits substantially should tax increases or cutbacks in future tax reductions be considered. The basic reasons for MBA's initial policy stance favoring spending cuts strongly over tax increases, was that Government spending crowds out private spending in an economy with limited resources; that entitlement program growth was out of control; that revenues from increased taxes can be abused through additional Government spending rather than being used to reduce the Federal debt, and that increased income or added taxes discourage and/or reduce the pool of private sector savings, which are already in short supply and extremely costly vis-a-vis the demands of the private sector for using these savings.