Death and taxes may be the ultimate inevitability, but the growing federal debt that will not shrink using the current tax system is a close second. Accumulated federal government debt is very near (89 percent) annual economic output compared to a historic average of about half (52 percent). Deficit spending projected for the next five years, assuming no change in tax or spending policies, will keep that percentage near 90 percent even as the economy expands.

On a cash flow basis, total U.S. receipts are expected to be about 15 percent of economic output in 2010 compared to a historic average of 18 percent. Economic recovery will improve that statistic but not enough to make any serious dent in the outstanding debt in the foreseeable future. Particularly fast-growing expenses for interest, social security, Medicare, and Medicaid will take 12 percent of GDP now and increase to 15 percent in 10 years, leaving very little left for everything else if nothing changes.

Something has to give. Future congresses will have to raise taxes, reduce spending, or both in order to bring the balance of income and expenditures to sustainable levels. From the revenue side, individual income tax (including small business proprietor income) is the largest single source and accounts for 43 percent of federal revenues.

The individual income tax allows a number of tax advantages for housing including itemization of mortgage interest (MID), real estate taxes, and mortgage insurance premiums, plus elimination of capital gains tax on principle residence appreciation up to $500,000 for a married couple.

There are very solid economic arguments behind these housing preferences including encouraging the positive social outcomes of homeownership and a broad source of wealth attainment. But these forgone taxes are among the largest of their kind in tax law. The estimated 2010 value of these preferences for homeowning taxpayers is $104 billion for the mortgage interest deduction, $25 billion for the real estate property tax deduction, and $15 billion for the capital gains exclusion. Under a hypothetical repeal, the actual change in government tax collections would be less because these estimates do not take into account changes in taxpayer behavior if the law were changed. But, the point is simple—these amounts represent inevitable targets when Congress is looking for ways to attack the debt and deficit spending.

Many proposals for limiting the MID have been made, including a recent Urban Institute proposal to “reform” the MID. Currently, homeowners are limited to deducting interest on $1 million in mortgage debt on a primary or second home plus the interest on up to $100,000 of home equity debt not used for home improvement. Proposals include reducing the $1 million limit to $500,000 or some percentage of local house prices, changing the deduction to a credit, and capping the deduction at the 28 percent marginal tax rate. Even the smallest of these proposals would significantly increase taxes for homeowners, especially younger households who have larger amounts of mortgage debt outstanding.

The consequences of restrictions or elimination have been the subject of many studies and include falling house values, lower homeownership rates, less home building and smaller homes, uneven geographical impact, and shifting of assets for higher-income households from interest paying assets to paying down mortgage debt.

More radical solutions for facing the structural gap have also been proposed. These include adding a federal value-added tax, which would act like a sales tax, and could affect many economic decisions. For example, a broad VAT would apply to a portion of mortgage interest paid, rent for apartment residents, remodeling expenditures, and new-home sales.

Regardless of your attitude on these facts, U.S. budget forces will require some action soon, and the housing incentives will be under close scrutiny as policy makers, economists, and politicians approach the problem from different angles. The NAHB will be ready.