Senator Coburn Unveils $9 Trillion Deficit-Reduction Plan, Proposes to Eliminate Housing Credit and HOME

On July 18, Senator Tom Coburn (R-OK) released a plan, Back in Black, which he says would achieve $9 trillion in savings over the next ten years.  According to a summary of the savings, $1 trillion would come from reforming tax expenditures; $4 trillion would be cut from discretionary spending, including $1 trillion from the Department of Defense; over $2.6 trillion would come from entitlement program savings; and $1.4 trillion in savings would come through interest payment reduction.  Senator Coburn acknowledges that his plan cannot pass the Senate or the House, but hopes people can choose options for reducing the deficit from his plan.

The plan includes department-by-department descriptions of proposed program cuts and reforms.  In the reforming tax expenditures and ending special giveaways section, the plan evaluates tax expenditures, loopholes, and tax subsidies.  The plan proposes to eliminate the Housing Credit at a savings of at least $57 billion over ten years, arguing that the Tax Code should not be used to promote affordable housing, a function which it says should be left to HUD. The plan characterizes the Credit as developing housing for upper low-income tenants who can afford the monthly rent payments instead of focusing on those who are more in need, such as the homeless.

The plan questions whether the Housing Credit increases the net supply of available affordable housing, or merely replaces already existing housing structures starting to age. The plan cites a 1992 Congressional Budget Office memo that compared the program to voucher programs and stated, “the Low Income Housing Tax Credit, like other supply subsidy mechanisms, is unlikely to increase substantially the supply of affordable housing.  Subsidized housing largely replaces other housing that would have been available through the private, unsubsidized housing market.”

The plan also proposes to eliminate the New Markets Tax Credit program, the Community Development Financial Institutions Fund, the Historic Preservation Tax Credit, and the Preservation Credit for Non-Historic Structures, characterizing them as duplicative of other federal grant programs such as the Community Development Block Grant, the National Community Development Initiative, and USDA‘s Rural Development program. 

The plan does not propose to eliminate the Mortgage Interest Deduction but suggests reforming it by eliminating the deduction for second homes and equity lines of credit and by lowering the cap for the primary deduction to homes worth $500,000, in order to better target those with the greatest need.

While the plan does propose eliminating certain targeted uses of tax-exempt bonds, such as Empowerment Zone tax-exempt bonds and tribal economic development bond programs, it does not otherwise reference tax-exempt or private activity bond financing generally.

In the area of discretionary spending, the plan proposes $88.73 billion in savings from HUD over the next ten years.  The plan calls for eliminating at least 12 HUD programs, including the HOME Investment Partnerships program (HOME) and NeighborWorks America, and reducing the cost of five others, including Section 202 Housing for the Elderly, Section 811 Housing for Persons with Disabilities, and the Community Development Block Grant program (CDBG). 

The plan cites Washington Post articles from earlier this year as an example of waste in the HOME program and states that “any essential services HOME provides that do not duplicate assistance provided by any of HUD’s other assistance programs should be consolidated into the appropriate remaining programs.” The plan suggests cutting funding for CDBG to $1.5 billion annually and targeting the funds to “truly needy neighborhoods and communities and projects with proven success of generating long-term economic development.”  It recommends adopting the spending reductions proposed in the Administration’s FY 2011 Budget for the Section 202 and Section 811 programs.  The Administration requested $274 million for Section 202 and $90 million for Section 811 in FY 2011, but requested $757 million for Section 202 and $196 million for Section 811 in FY 2012.

In addition to program cuts, the plan also suggests increasing over a five-year period the percentage of adjusted gross income a tenant receiving housing assistance pays, from 30 percent to 35 percent.  The plan also calls for the Federal Housing Administration (FHA) to avoid the risk of needing a taxpayer-funded bailout by “following its minimum credit scores requirements, returning to its previous limit of insuring no more than 30 percent of mortgages in a single building, reducing the loan amount it insures from $729,750 to $500,000, and ending coverage of mortgages provided by companies with legal problems.”

In the section on the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac, the plan makes the following recommendations: increase down payments for GSE-backed mortgages to at least 10 percent, gradually lower the conforming loan limits, gradually reduce the GSE’s investment portfolio, gradually increase the guarantee fees GSEs charge, and reduce executive pay to that of federal pay schedules and end funding of legal fees for former executives.

Coburn is a member of the Senate’s bipartisan “Gang of Six,” which spent months trying to reach a bipartisan agreement on a deficit reduction plan.  Those negotiations stalled in May when Coburn withdrew from the meetings over differences on entitlement spending.  Coburn announced today that he is rejoining the group after additional health care cuts were added to the group’s plan. The Gang of Six briefed a group of 40 to 50 Senators on its plan this morning.

The Gang of Six’s plan, which has not been publically released and is separate from Coburn’s plan, would reduce the deficit by $3.7 trillion over the next ten years.  Senator Kent Conrad (D-ND), chair of the Senate Budget Committee and member of the Gang of Six, said that almost three-fourths of the savings will come from spending cuts and the remaining one-fourth will come from higher revenues.  The plan is receiving praise from Senators in both parties.  It is unclear how the plan will affect ongoing negotiations to increase the debt ceiling.