The National Association of Home Builders (NAHB) has called on Congress to simplify the tax code as part of a comprehensive tax reform effort in order to help small businesses to continue serve as an engine of economic growth.

Testifying on behalf of NAHB before the House Small Business Committee, Maryland home builder Marty Mitchell said that given the huge complexities in tax law, today's complicated federal tax system acts as a burden and hindrance on small businesses, which serve as the backbone of the economy.

"The home building community supports simplifying the tax code as part of a comprehensive tax reform process," said Mitchell. "Such an effort should only occur after a thoughtful and deliberate vetting process that examines proposed changes, necessary transition rules and economic impacts."

Most small businesses, including the vast majority in the residential construction sector, are organized as pass-thru entities and therefore report and pay individual tax rates on their net business income. Thus, for small businesses, individual income tax rates are business tax rates, according to NAHB.

"Therefore, NAHB strongly supports extending the 2001 and 2003 income tax cuts now scheduled to expire at the end of 2012 in order to improve the business environment in this country," said Mitchell. "We need permanency in the tax code and certainty for small businesses."

Absent congressional action, the top marginal tax rate will jump from 35 percent to 39.6 percent along with rate increases at the lower brackets, NAHB noted.

NAHB is also urging lawmakers to extend the current 15 percent rate on dividends and capital gains, which is important to small business owners. A higher capital gains tax rate could also affect the multifamily sector, as the sale of apartment buildings can give rise to capital gains as part of the development and operation process, NAHB stated.

"As many home building companies are family-owned like mine, it is also important that the present law estate tax rate rules also be extended or the tax itself eliminated," said Mitchell.

He also stressed that it is critical that the mortgage interest deduction, which has been part of the tax system since 1913 and plays an indispensible role in promoting homeownership, should not be curtailed or eliminated as part of any tax reform effort.

"Weakening or abolishing the mortgage interest deduction would harm home values, push more home owners underwater and exacerbate the foreclosure crisis just as signs are beginning to appear that scores of housing markets are showing signs of improvement following the worst downturn in decades," said Mitchell. "Such changes would also act as a tax increase on the more than 30 million taxpayers who benefit from the deduction, and who made home financing decisions based on long-standing tax rules. In short, it would be unfair and economically destructive to tamper with the deduction."

As the fledgling economic recovery moves forward, Mitchell added that many home builders are still facing major tax liabilities on income never received as they work with lenders to restructure debt due to land and home price declines in recent years.

To help small businesses to continue to create jobs and generate economic growth, NAHB is urging Congress to provide a tax exclusion for business debt forgiveness and allow this exclusion to continue until the business economic climate substantially improves.

"Such a tax policy change would enable small, family-owned firms to avoid bankruptcy and contribute to the economic recovery as individual local markets improve," said Mitchell.