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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.

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Despite the industry’s dire warnings, some economists and housing industry experts don’t see the proposed change as a death knell for the industry.

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“It would not kill off the housing industry,” says Anthony Sanders, a real estate finance expert at the Mercatus Center at George Mason University in Arlington, Va.

In fact, Mr. Sanders thinks, the current law encourages households to take on additional risk.

“This is a positive when the housing market is increasing in price, but deadly on the downturn,” he says. “So we should not be encouraging risk-taking, particularly if taxpayers foot the bill on the downside.”

The subsidy has been particularly advantageous for the wealthy, says Sanders, who says most of the benefit mainly goes to such East Coast and West Coast communities as New York, Washington, San Francisco, Los Angeles, and San Diego, where housing is more expensive relative to the rest of the nation.

In those markets, he thinks a change in the tax code could have an adverse impact since the ability to deduct mortgage interest inflates housing prices since buyers can afford to pay more.

“That is why you won’t find much support for implementing any kind of lowering of the use of the mortgage interest rate deduction from legislators in those areas,” says Sanders. “It is almost like an entitlement and trying to take away those is very, very dangerous for the politician.”

This would not be the first time the real estate industry has confronted attempts to change the mortgage interest deduction. In 1995, then-Representative Dick Armey (R) of Texas proposed a flat-income tax with no deductions. Then, in 2005, President Bush’s tax reform panel suggested replacing the deduction with a 15 percent tax credit.

The real estate industry complained that the change would send a chill through the real estate market, which was leading the economy.

“Nothing happened with that proposal, it got shelved,” says Chuck Marr, director of federal tax policy at the Center on Budget and Policy Priorities in Washington. “But, it may have paved the way for the next one (proposal) to do it.”

Mr. Marr expects any changes will be part of a larger effort. But, he says even conservatives are starting to come on board, preferring to reduce a subsidy instead of a direct increase in taxes.

“We’re starting to see where this is becoming more palatable for elected officials,” he says.

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