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Mortgage interest deduction: Can US debt panel keep it on the chopping block?

The mortgage interest tax deduction is cherished by many Americans as the path to homeownership. But the co-chairmen of the US debt panel say it should be rolled back.

By Ron SchererStaff writer / December 2, 2010

Debt Commission co-chairmen Erskine Bowles (l.) and former Wyoming Sen. Alan Simpson, speak to the media on Capitol Hill in Washington, Wednesday. The two chairmen said Thursday that the mortgage interest tax deduction should be rolled back.

Alex Brandon/AP

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Most people getting ready to buy a home have done the drill, totaling their monthly payments to see if they could afford to borrow enough money to buy the house they want.

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But, while doing that calculation they often are reminded by their real estate broker: you can probably afford more than you think because the tax law gives you a mortgage interest deduction. That might allow you to adjust your income tax exemptions, giving you more take-home pay.

However, on Wednesday, as part of a broad effort to rein in the nation’s ballooning debt, the co-chairmen of the National Commission on Fiscal Responsibility and Reform, a bipartisan panel appointed by President Obama, proposed rolling back that deduction. The proposal would give homeowners a flat 12 percent deduction for mortgage interest, as opposed to a deduction defined by their income tax bracket.

In addition, the co-chairs, Alan Simpson and Erskine Bowles, proposed capping the size of the mortgages eligible for the subsidy at $500,000 instead of the current $1.1 million. And, they would completely eliminate second homes from mortgage interest deductibility.

The current deduction is now the second most expensive tax subsidy, expected to cost the US Treasury $104 billion in 2011. Many economists and budget watchers have long viewed it as a form of wealth transfer to the rich, since they benefit the most.

But the deduction also resonates with many people as one of the ways to make the so-called American dream of homeownership come true.

The real estate industry is quick to respond whenever the subject of making any changes in the deduction comes up.

Immediately after the co-chairmen’s report came out, Michael Berman, the chairman of the Mortgage Bankers Association, said the proposal “would have a devastating impact on both present and future homeowners in this country.”

The National Association of Realtors (NAR) said the proposed changes would lower real estate values by 15 percent, possibly increasing the number of foreclosures as home prices sink.

“It will effectively close the door on the American dream,” said Ron Phipps, the president of NAR in a statement. NAR called on the 1.1 million realtors to write or call Congress using such words as “I have been on the front lines of the housing crisis.”

When Congress first passed the interest deduction in 1913, it was very rarely used for mortgages. It wasn’t until after World War II when American veterans came home, took out loans, and started paying taxes, that the deduction became more important.

“Over the course of fifty years, however, politicians and the housing industry transformed the subsidy into a sacred cow,” writes Dennis Ventry, a law professor at the University of California, Davis in an analysis with the title: “The Accidental Deduction: A History and Critique of the Tax Subsidy for Mortgage Interest.”

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