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State lawmakers consider tax-free savings accounts for first-time homebuyers

BY Sunday, March 28, 2021 06:20pm

First-time homebuyers could save for a down payment or closing costs through new tax-exempt savings accounts under legislation that’s designed to promote home ownership and retain talent in Michigan.

Under separate bills pending in both the state House and Senate that have cleared their respective committees, first-time homebuyers could save up to $50,000 in an account they open with a bank, credit union or other financial institution. 

COURTESY PHOTO

Designated accounts opened under the proposed First Time Home Buyers Savings Program could accrue tax-free earnings for up to 20 years.

Consumers who create an account to save for the future purchase of a primary residence could also claim an income tax deduction on their state tax return under the legislation. The bills would allow a single tax filer to take a deduction of up to $5,000 annually, and up to $10,000 for a joint return.

Bill co-sponsor Rep. John Damoose, R-Harbor Springs, touts the legislation as a way to “help even more Michigan citizens achieve what’s always been the foundation of the American dream, which is home ownership.” 

Damoose described the accounts as “an innovative savings device designed to encourage people to plan for the future with a specific goal of home ownership in mind.”

“Home ownership matters in Michigan. It leads to the economic stability in communities throughout our state,” Damoose said during a recent House Tax Policy Committee hearing.

State Rep. Mari Manoogian, D-Birmingham, says allowing residents to form tax-free accounts to buy their first home promotes financial literacy. Helping people gain a small tax advantage to save for a future home purchase can also contribute to addressing “brain drain” of “our bright young folks to other states and large cities” that’s been occurring for years in Michigan, Manoogian said.

“We should be working to keep those young people and their talents and those new families here in Michigan,” she said.

The House Tax Policy Committee last week cleared two bills that allow the formation of the savings accounts and create the tax deductions. The bills are now up for consideration in the full House.

The Senate Finance Committee also passed its version of the bills and recommended approval in the full Senate.

Changes likely

The versions that the House committee passed sought to address Michigan Department of Treasury concerns about the administrative burden of the savings accounts and ensure their proper use.

“This is a laudable goal, but the trick is in the effectiveness of the legislation and also its execution,” Paul Connors, legislative liaison with the Department of Treasury, told lawmakers in committee testimony earlier this month.

Despite the changes in the House bills since introduction, the Treasury Department still opposed the legislation. Connors urged lawmakers to get financial institutions involved in the discussion as they work to craft final versions of the legislation.

House Tax Policy Committee Chairman Rep. Matt Hall, R-Marshall, expects further changes in the bills. Legislation supporters “are trying to get to a place where everyone supports this,” Hall said.

Another change to the House version addressed a concern raised by state Rep. Steve Johnson, R-Wayland, about account withdrawals that do not meet requirements and become subject to a 10 percent penalty. Johnson cited an example of someone serving in the military who opens an account to save for a future home purchase and then gets deployed or re-assigned out of Michigan. At Johnson’s urging, the committee added an exemption to the penalty for military personnel.

The Legislature passed similar bills in late 2018 to allow tax-free accounts for first-time homebuyers, only to have them vetoed by then-Gov. Rick Snyder. He “indicated support for the goal, but questioned the use of the tax code to incentivize taxpayer behavior,” according to a House Fiscal Agency analysis of the legislation — House Bills 4289-4290 and Senate Bills 145-146.

Realtors support

Nine other states have enacted legislation to allow tax-free savings accounts for first-time homebuyers, according to Brad Ward, vice president of public policy and legal affairs at the Michigan Association of Realtors.

Most of those state laws have passed within the last few years and little information is available yet on their effectiveness in promoting home ownership, although “we do believe that this program can be successful (and) we want to be ambassadors for this program,” Ward said. Michigan Association of Realtors has been a “big proponent” of the idea, he said.

“It gets at part of the affordability question that we’re wrestling within in this state, from at least the savings side,” Ward said. “Owning a home is one of the fastest ways to build wealth in America and we want to make sure more people have that opportunity to do so.”

While few people will have the ability to deposit large sums into an account, even doing a few hundred dollars annually over a period of years adds up and “makes a big difference for them” when they go to buy their first home, Ward said.

Other organizations backing the legislation include the Michigan Credit Union League, the Michigan Mortgage Lenders Association, the Home Builders Association of Michigan, chambers of commerce in Grand Rapids and Detroit, the Michigan Chamber of Commerce, and Habitat for Humanity.

As lawmakers continue to work on the bills, the Michigan Association of Realtors remains open to working with the state Treasury Department to address concerns that also include “guardrails” to ensure consumers properly use the savings accounts for eligible purposes, general counsel Brian Westrin said.

“We want to make sure that this gets established and that those expectations for an account holder are clear,” Westrin said.

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