Will the sacred cow otherwise known as the mortgage interest deduction (MID) be put out to pasture in the next presidential term?
For at least the past half decade, this popular deduction, which deprives the Treasury of anywhere from $95 billion to $130 billion per year, has been seen as vulnerable to Congress’ budget-cutting knife. And the two presidential candidates have indicated they might be open to, if not eliminating MID, reining it in. Rep. Paul Ryan, whom Gov. Mitt Romney chose as his vice presidential running mate, is a deficit hawk whose two budget plans (each passed by the House of Representatives) called for the elimination of several tax benefits including MID.
The Obama administration’s 2013 budget includes a proposal to limit how much Americans earning more than $250,000 annually could deduct for mortgage interest. That might explain why Richard Green of the Lusk Center for Real Estate thinks Obama, in his second term, might go after the deduction more aggressively than Romney would as president.
The arguments for and against MID are well known: Proponents such as the NAHB say this middle-class benefit “is particularly important for younger home buyers who are paying a greater share of interest in the early years of a mortgage.” MID’s elimination, this thinking goes, would weaken demand and cause home prices to drop by as much as 20 percent.
Opponents say MID only benefits the 25 percent to 33 percent of taxpayers who itemize each year, which generally translates into the top 20 percent in income. The money saved by disallowing the deduction could be diverted to vital needs such as education and infrastructure.
Two of the more prominent and widely discussed tax reform proposals—Domenici-Rivlin and Simpson-Bowles—have proposed converting MID into a tax credit of between 12 percent to 15 percent, with all taxpayers eligible. Simpson-Bowles also called for capping the mortgage amounts for which the deduction could be applied at $500,000 and eliminating it entirely for second homes and home equity credit lines, something Romney has advocated.
Ken Gear, executive director for the Leading Builders of America, still doesn’t think either party favors eliminating MID outright. But he can envision something akin to the Simpson-Bowles tax credit idea re-emerging as Congress scrambles to close the budget gap. He’s just hoping it’s not the tip of the iceberg. “We need to cut the deficit, but in a responsible way that’s not on the back of the housing industry.”