Deduction Eruption

That automatically would mean a loss for higher-income taxpayers with big houses. For example, anyone in the 35 percent bracket can now reduce his or her tax bill by an amount equaling 35 percent of the interest paid (up to $1.1 million) and 35 percent of the property taxes paid.

A lower-income person, on the other hand, gets less of a benefit -- because a $10,000 mortgage interest deduction cuts taxes $1,500 for a person in the 15 percent bracket, but $3,500 for a person in the 35 percent bracket.

Furthermore, the 65 percent of taxpayers who don't itemize deductions "don't see the benefit at all" under the current system, said Dean Baker of the Center for Economic and Policy Research. The panel's proposed 15 percent mortgage interest credit, in contrast, could be taken without itemizing.

Advocates also point out that taxpayers should consider the panel's proposal as a whole. Beyond the provisions that are hot buttons for homeowners, the panel proposes other substantial changes, including lower tax rates and investment taxes and larger credits for children and savings.

"If people lose in one provision, we've made it up in other areas," panel spokeswoman Tara Bradshaw said.

For example, the plan eliminates the alternative minimum tax, which affects mostly upper-income taxpayers. The AMT was designed to prevent millionaires from avoiding taxes but next year will affect 21 million taxpayers earning as little as $75,000.

The real estate industry's quick, sharp attack on the plan led many observers to declare the proposal dead on arrival. The National Association of Realtors, Mortgage Bankers Association and other industry leaders insist that the deduction would drive home prices down as much as 15 percent and undermine consumer confidence, slowing a major engine of the economy.

Jerry Howard, chief executive and vice president of the National Association of Home Builders, pledged Thursday to "do our best to convince the administration to reject the proposal." The trade association released a survey of 800 likely voters by Public Opinion Strategies taken last weekend that found that 75 percent opposed the proposals.

NAHB President David F. Wilson said the plan will "mean a big tax hike for millions of American homeowners, will reduce home values and will send a chill throughout the housing market." The custom-home builder from Ketchum, Idaho, said high-cost areas would "bear the brunt" of changes, which would "cripple those communities that rely on second homes and vacation homes as a major source of their economy." NAHB president-elect David L. Pressly said middle-class Americans would be hurt the most, and "the newest homeowners will probably be hit the hardest."

"If [the recommendations] are not dead on arrival [they're] on death's doorstep in Congress," Kenneth Mayland of ClearView Economics told Market News International. Rep. Gerald C. Weller (R-Ill.), a member of the House Ways and Means Committee, which oversees tax legislation, said seven of 24 Republicans have already signed a letter opposing the plan.

Robert Curran, senior director and home building analyst at Fitch Ratings, said that the most that is likely to happen is a reduction in the current $1.1 million loan cap.

But the panel's report makes a case for challenging the unfairness in what amounts to a $75 billion annual subsidy for housing. "Under current law, the tax benefits for housing, which are larger than the entire budget of the Department of Housing and Urban Development, mostly go to the minority of taxpayers who itemize deductions," the report said. ". . . These taxpayers typically are drawn from higher-income groups. Over 70 percent of tax filers did not receive any benefit from the home mortgage interest deduction in 2002."