The debate over whether to reduce or eliminate the mortgage interest deduction is open again as federal lawmakers seek ways to reform the U.S. tax code and reduce the U.S. national debt.
The mortgage interest write-off dates to 1913. It lets homeowners deduct interest on up to $1 million of mortgage value for primary and secondary homes, as well as on home equity interest debt up to $100,000.
The Congressional Research Service said the mortgage interest deduction will cost the Treasury about $100 billion in 2014, though the Joint Committee on Taxation has said the number will be closer to $70 billion. It has been one of the costliest items in the tax code.
Democrats and Republicans alike are calling for a variety of changes, including eliminating the deduction, turning it into a tax credit or placing a limit on how much of a write-off high-income taxpayers can claim.
The housing industry, which spent about $80 million last year lobbying Congress, has made a strong push to keep the deduction, saying that curtailing it would hurt consumers, price-out would-be buyers and threaten the recovery of the housing market. But some economists and academics say the mortgage interest write-off favors the upper-middle class and the rich, and that it rewards people for getting into deeper debt with pricier homes.
President Obama has proposed ending the mortgage interest write-off for homeowners above the 28-percent income tax bracket. House Speaker John Boehner (R-Ohio) has said he'd be willing to limit all tax deductions.
"It would be political suicide for them to get rid of it, but I believe they may reduce the amount deducted or restrict it to lower-priced homes," said Mark Boud, president of Irvine-based consulting and data firm Real Estate Economics. "If Congress says that interest is deductible for mortgages up to, say, $400,000, then Orange County is at a disadvantage."
Recent figures by DataQuick show Orange County's median home price was $477,000 in February, meaning that half of the homes sold below that price and half sold for more.
'Savings for many homeowners'
There is sharp disagreement over who benefits most from the mortgage interest deduction.
The National Association of Homebuilders says the deduction is broadly used across income groups and geographic areas.
The National Association of Realtors has said the write-off helps mostly middle- and lower-income families, with 65 percent of families who use it earning less than $100,000 per year.
"If the deduction is taken away, it would cost the average Californian nearly $4,000 annually," said Don Faught, president of the California Association of Realtors. "Further, more than 694,000 California households would no longer be able to afford to buy a median-priced home."
At the Legal Aid Society of Orange County, attorneys regularly see homeowners who have been unemployed or under-employed for months or even years and need every break they can get, said Pat Pinto, manager of the Foreclosure Mitigation Unit.
"Many homeowners in Orange County are barely making it. Writing off their mortgage interest on their federal tax returns is a substantial savings for many homeowners," Pinto said. "Without the deduction, many people might not be able to stay in their homes because they cannot afford to pay the higher taxes."
Upper-income taxpayers favored?
However, the nonprofit Tax Policy Center, run jointly by the Urban Institute and the Brookings Institution, has asserted that the deduction mostly helps upper-income families.
According to one of its reports, taxpayers in higher tax brackets are more likely to itemize than those in lower brackets. It said only about 4 percent of taxpayers in the 0 percent bracket and 16 percent of taxpayers in the 10 percent bracket itemize, while more than 70 percent of taxpayers in the 33 percent bracket and nearly 90 percent in the 35 percent bracket do. The deduction can only be taken by taxpayers who itemize their returns.
"In the unlikely event Congress simply repeals the mortgage deduction, the average tax bill would increase by $710. But those who earn between $30,000 and $40,000 would pay about $70 more while those making more than $1 million would pay an additional $4,000," said Howard Gleckman, an Urban Institute fellow, in a separate report for the Tax Policy Center.
Richard Green, director of the Lusk Center for Real Estate at the University of Southern California, told a U.S. Senate committee in 2011 that the deduction favors high-income households.
He said phasing it out "would encourage households to pay down their mortgages more quickly and would (cause them to) rely less on leverage ... (and) household deleveraging would lead to greater market stability."
Green and others have advocated "a targeted, refundable credit" as a more effective way to encourage homeownership.
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