Tax panel would cut homeowner deductions

Nation's Housing

October 30, 2005|By KENNETH HARNEY

Is there really any chance that Congress could take away mortgage interest and state and local property and income tax deductions from homeowners?

A presidentially appointed bipartisan commission is expected to urge precisely that when it delivers its final report to the Bush administration Tuesday.

The mortgage interest deduction - which currently allows write-offs on first and second loan amounts up to $1.1 million - would be scrapped and replaced with a 15 percent credit on sharply limited mortgage amounts. Deductions for state and local property and income taxes would be eliminated altogether.

The 15 percent credit would be only for mortgages up to a $300,000-$350,000 ceiling. Interest on home equity loans no longer would be tax-deductible.

In exchange for these losses of tax benefits, the advisory panel would eliminate the alternative minimum tax, add $100,000 to the current $500,000 tax-free exclusion on home sale profits, lower tax rates on capital gains, cut the number of tax brackets and provide a variety of other simplifications to the federal tax code.

President Bush and the Treasury Department are expected to study the panel's recommendations and include at least some of them in a budget proposal to Congress early next year.

But let's get real here: Nobody seriously believes that the president or Congress - all elected politicians - would do anything to reduce tax benefits for their largest and most potent constituency, right? Isn't the mortgage interest deduction sacrosanct, politically untouchable, carved in marble on Capitol Hill? Ditto for write-offs of local property taxes and income taxes?

Imagine the screams of pain from homeowners in high-cost, high-tax states such as California, New York, Massachusetts and much of the East Coast. Imagine a Million Realtor March on Washington. Imagine a House and Senate with no incumbents.

That is all certainly the conventional political wisdom, and may indeed prove correct. Even the president told the advisory panel in January that he would oppose any tax changes that would hurt homeownership.

Case closed? Dead on arrival? Maybe, but not quite.

Though the details of the reform panel's recommendations won't be known until Tuesday, its focus on cutting housing benefits casts fresh light on the sheer size, and asymmetrical distribution, of those subsidies. The panel members went after housing because housing tax expenditures present such a big target, especially in an era of double-digit appreciation, McMansions and monster mortgages.

Forced to raise revenues to replace the $1.2 trillion 10-year cost of killing the alternative minimum tax, high-cost housing became an obvious place to look.

Consider these numbers if you want to understand where the reformers - Republicans and Democrats alike - are coming from:

The mortgage interest deduction will cost the Treasury $72.6 billion this year alone, according to congressional estimates.

The $250,000 and $500,000 tax-free exclusions of home-sale profits for single sellers and joint filers will cost $23 billion this year.

Property tax write-offs cost $20 billion, and tax subsidies for local and state housing bond programs add another $1 billion.

Who receives these tax breaks? When a congressional committee examined the distribution of homeowner benefits for 2004, it found that people earning $200,000 and more a year - just one-half of 1 percent of all homeowners filing for deductions - pocketed 22 percent of the $70.2 billion in write-offs last year.

Homeowners with incomes between $50,000 and $75,000 - 26.4 percent of all owners claiming deductions - received just 16.1 percent of the $70 billion total. Owners with incomes of $30,000 to $40,000 represented 10 percent of all mortgage-deduction recipients, but got just 3.1 percent of the total tax-savings pie.

Property tax write-offs showed a similar distribution. High-income households were 3.8 percent of all owners claiming property tax deductions in 2004, but received 15 percent of the total. Homeowners with $30,000-$40,000 incomes made up 9.4 percent of those claiming property tax write-offs, but received 3.7 percent of the benefits.

In replacing the mortgage-interest deduction with a 15 percent credit, the reformers can argue that far more homeowners - the vast numbers who do not itemize on federal tax filings - will be able to share the tax subsidy goody bag.

By lowering the mortgage ceiling to about $300,000, the subsidies would not so heavily favor wealthy owners in high-cost states.

That, in turn, could be supportive of homeownership nationwide for middle-income citizens who either rent or don't itemize on their taxes. Who knows - the homeownership rate might even go up.

That's the idea anyway. Can it become law? Not in an election year for sure. Could some of it find its way into law someday, as the country grapples with budget deficits, war expenses and disaster relief reconstruction? That's where the odds start looking slightly better.

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