Goodbye Mortgage Deduction?

In contrast, income from other forms of investment is taxed at higher rates, creating the relative advantage for housing.

Investment interest is taxed at rates as high as 35 percent; the rate on dividends was the same until it was reduced in 2003 to 15 percent.

It is this relative advantage for housing that may be called into question by the tax commission. Members have said at hearings that they are considering a wide range of ways to stimulate savings. The options range from cutting rates on dividends, interest and capital gains to streamlining current tax-free savings mechanisms for retirement, education and health care -- or even junking the income tax in favor of a system that taxes only consumption.

Tax commission member Bill Frenzel, a former U.S. representative from Minnesota, said panelists are wary of recommending any changes that may pop a real-estate bubble.

"We have to be careful, because tax bills have hurt markets in the past," he said in an interview. Bush, in his instructions to the tax panel, said that it should "recognize the importance of homeownership" in considering what changes to recommend.

The toughest issue to tackle may be the mortgage-interest deduction, which has long been viewed as politically sacred, former Treasury secretary James A. Baker III told the panel in March.

"This is a political exercise every bit as much as it is an economic exercise," he said.

David R. Kotok, chairman and chief investment officer at Cumberland Advisors Inc. in Vineland, N.J., agrees. ``It would take a lot of political force to get the Congress to pass a law that interferes with the housing structure, because there are so many millions of people who are invested in the current system," he said.

Former Treasury Department economist C. Eugene Steuerle said he doesn't believe that housing incentives, which are worth about $150 billion annually, are off-limits. "Politically, I think the case against making changes is exaggerated," Steuerle, now a senior fellow at the Urban Institute, a nonpartisan research organization based in Washington, said in an interview.

Linda Goold, tax counsel for the National Association of Realtors in Washington, said it's possible the tax panel may recommend replacing the interest deduction with a tax credit that would be more beneficial to lower-income Americans. They usually don't have enough deductions to justify itemizing them, a prerequisite for taking advantage of the mortgage-interest deduction.

While government studies show that 69 percent of Americans own their homes, only 33.6 percent of Americans itemize deductions, according to Internal Revenue Service data for 2003.

Changing to a tax credit would mean all homeowners with mortgages would benefit.

"It's not as draconian as repealing the mortgage interest deduction would be," Goold said. She said her group is studying the idea and wouldn't necessarily oppose it.

Jay Brinkmann, an economist at the Mortgage Bankers Association in Washington, said his group is analyzing a plan to convert the mortgage interest deduction into a credit and that it "might be acceptable" depending on the details.

The panel may also consider a recommendation by the congressional Joint Committee on Taxation to repeal the deduction for interest on home equity loans, Goold said. The panel's recommendations may include reducing the $1 million cap on which mortgages qualify for tax incentives, she said.