Americans may no longer be entitled to a mortgage tax deduction if the deficit commission gets its way on the tax break. Image: CC erion.shehaj/Flickr
The mortgage interest deduction is a tax break Americans hold sacred. But the mortgage interest deduction takes a big bite out of federal tax revenue. The Obama administration’s deficit reduction commission has put it on the table, causing an uproar from homeowners and Realtors.
Mortgage interest deduction a big target
The mortgage interest deduction is regarded as an inalienable right in the U.S. Until the deficit commission came along, the tax break was considered politically invulnerable. But for a presidential panel looking to cut $4 trillion in deficit spending over 10 years, the $100 billion cost of the mortgage interest deduction in terms of lost federal tax revenue is an obvious target. The National Association of Realtors, which has courted Congress with nearly $38 million in campaign donations over the last 20 years, wants the deficit commission to leave the mortgage interest deduction as is.
Moment of truth for tax break
The mortgage interest deduction may survive deficit reduction, but not unscathed. Under the current mortgage interest deduction, up to $1.1 million in debt for a primary and second home qualifies for the tax break. In the deficit commission report titled “Moment of Truth” submitted to lawmakers Dec. 1, only $500,000 of debt from a primary residence would qualify for the mortgage interest deduction. Plus, the tax break would be converted from a deduction to a 12 percent credit against interest, corresponding with the lowest of three proposed income tax rate reductions to 12 percent, 22 percent and 28 percent.
Economists say tax break is overrated
The National Association of Realtors has said tampering with the mortgage interest deduction will delay any recovery in the housing market and plunge the country into a double-dip recession. However, economists say the tax break ends up making lower-income households subsidize people with expensive homes. In fact, according to Congress’ Joint Committee on Taxation, of $104 billion the mortgage interest deduction is estimated to save taxpayers for 2010, about one-third of that tax break goes to 11 percent of taxpayers making at least $200,000 a year. Economists also say the mortgage interest deduction artificially inflates home prices — which is what Realtors like to see.
