The U.S. Congress is on the verge of a complicated process that will juggle federal spending against its tax codes and laws, with a lot of items on the table to avoid falling off what has been dubbed a "fiscal cliff."
But many people in Inland Southern California believe that eliminating the mortgage interest deductions for homeowners would be a catastrophic move for an area that was practically the launching pad for the real estate crash that triggered 2008's Great Recession. Tax reform has been a frequent campaign issue this year, with tax cuts enacted under former President George W. Bush scheduled to expire at the end of this year.
If homeowners would no longer be allowed to deduct the interest that they paid on a mortgage and claim a refund for many the only significant deduction they can put on their 1040 forms and the only sizable check outside of a paycheck they receive from any source -- it might convince thousands that their best move is to walk away from their homes, experts say. It could also curtail many Inland consumers' discretionary spending and hurt the retail sector of the economy,
No one knows how large a role tax deductions on mortgage interest will play in the Washington debate as Congress tries to deal with spending and taxes. Experts predict it would be unlikely that any new policy would wipe out the deduction entirely in one year. The more likely scenario would be a phased-in program that starts with very expensive homes, few of which are in the Inland Empire.
But many middle-income taxpayers see mortgage interest deductions as the only break they get. According to a recent Pew Research Center study, the best definition of middle income is about $68,000 for a family of four. Most at that level might contribute something to their church or write a modest check to the Red Cross but are not likely to accumulate enough charitable contributions to make a big difference at tax time.
"I don't know why they took away the other deductions, like the car notes and the credit cards," Ronald Newton, a 72-year-old retired shipyard foreman who lives in Menifee, referring to tax code revisions made in the mid-1980s. "About the only thing I have left is my mortgage."
What makes it especially worrisome in San Bernardino and Riverside counties is that more than half of the homeowners currently still paying mortgages owe more on the home than it would currently appraise for.
"This would have a devastating impact when you figure that 51 percent of all our homeowners are underwater," Redlands-based economist John Husing said.
According to the congressional Joint Committee on Taxation, an estimated 40 million homeowners take this deduction every year, and the average savings for them is about $600. The mortgage deduction shrinks the federal government's coffers by about $82 billion a year.
No politicians have proposed an outright elimination of the deduction. But Richard Green, director of the Lusk Center for Real Estate at the University of Southern California, testified last year before the U.S. Senate Banking Committee that the deduction, which has been around for almost 100 years, is outdated and does not encourage homeownership.
What it does is encourage debt and spur consumers to purchase bigger houses than they would otherwise. Green told senators a tax credit for buyers would go further in getting first-time buyers into homes.
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