Tax Refarm and Haus~ng

The construction industry in the United States has experienced a remarkable downturn in the past five years. In the mid 1980s, new housing starts averaged nearly 1.8 million per year, slightly below the record pace of 2 million per year in the late 1970s. By 1991, however, the number of new housing starts was just above 1 million. The share of GNP devoted to residential investment fell to 3.3 percent in 1991, the second lowest level in the last three decades. Many factors contributed to the recent decline in new construction, including changes in real and nominal interest rates, a recession, and a sequence of tax reforms. The Tax Reform Act of 1986 is frequently cited as a key contributor to the recent construction decline, particularly the decline in multifamily housing. One of the Act’s objectives was to reduce investment in tax shelters, and rental housing had been one of the most active shelter vehicles in the early 1980s. "Leveling the playing field," the mantra of 1986 tax reformers, required raising the tax burden on rental housing relative to that on corporate capital. The view that the Tax Reform Act of 1986 is the source of the post-1986 real estate malaise underlies the recent political pressure to repeal passive loss restrictions and several other provisions in the Act and to provide new incentives for real estate investment. It is widely agreed that recent tax reforms have affected incentives for housing consumption and for investment in rental properties. Reductions in marginal tax rates have lowered the value of tax-exempt imputed income for homeowners, with particularly large changes for