The Nation's Housing

The Nation's Housing: Could Congress Change Mortgage-Interest Deductions?

By Kenneth R. Harney
Saturday, August 29, 2009

You might assume that in August, with the Senate and House on their summer break, nothing much happens on Capitol Hill.

You know the old saw: Your money is safe when Congress is out of town.

But that's not quite the way it works. Committee staff, economists, tax lawyers and other policy shapers who toil below the headlines never really leave town. For example, earlier this month, the nonpartisan Congressional Budget Office delivered its latest revenue-raising options for Senate and House consideration as they write this fall's tax and budget legislation.

Tucked away in the report are several incendiary plans that could -- if adopted -- cost homeowners billions of dollars. Though not formal legislative proposals, the CBO's options represent a handy fiscal menu from which legislators can pick and choose to reduce the deficit -- now at unprecedented levels -- or pay for new programs.

Tops on the CBO's hit list for housing: Slash deductions for homeowner mortgage interest from the current $1.1 million limit to $500,000, phased in with $100,000 annual reductions starting in 2013 and extending to 2019. Under current law, taxpayers can write off mortgage interest on their principal-home debt up to $1 million, and on home-equity debt up to $100,000.

Under the CBO's option, that maximum mortgage-debt amount would shrink annually until it hits $500,000. Over 10 years, this change alone would boost federal tax collections by an estimated $41 billion.

The CBO offered a second option if Congress wants to raise a lot more money: Replace the current mortgage interest deduction with a flat 15 percent tax credit for everybody with mortgage amounts below the declining limits in the first option. Rather than taking write-offs that are tied to your personal income tax bracket, every homeowner would get a credit worth 15 percent of mortgage interest paid.

Who would benefit? Primarily lower- and moderate-income taxpayers who don't itemize deductions on their tax returns. Who would pay more? People with big mortgages and higher-than-average incomes, who are far more likely to itemize under current rules.

Credits reduce taxes dollar for dollar at the bottom line of returns. Deductions, by contrast, are tied to taxpayers' marginal brackets. The higher the bracket, the bigger the percentage of the write-off.

The CBO notes that this idea is not something it just dreamed up. Four years ago, a tax-reform advisory commission appointed by President George W. Bush came up with a similar recommendation to transform the mortgage deductions into a credit. The attractiveness of the credit concept is both fiscal -- it raises a boatload of new money for the government -- and social.

In addition to raising $13 billion in 2013, the CBO estimates that moving to a credit approach would increase revenue by nearly $390 billion from 2013 to 2019. Equally important, the credit plan would also please critics who say the current tax system shortchanges lower- and moderate-income homeowners and encourages Americans to overspend on massive houses loaded down with monster mortgages.

Though the CBO concedes that this option might also have negative side effects on the real estate market -- fewer sales, less money spent on construction, lower home values at the upper end -- it's not clear what effect it would have on the national rate of homeownership. Why? The report notes that Canada, Britain and Australia all have roughly similar homeownership rates as the United States, but none provides mortgage-interest tax deductions.

Other housing-related items on the CBO's revenue-raising target list:

-- Get rid of all write-offs for state and local taxes, including property taxes. That would pump $343 billion into federal coffers from 2010 to 2014, and $862 billion by 2019.

-- Clamp a 15 percent cap on the value of all itemized deductions -- not just mortgage interest and property taxes but also charitable contributions, medical expenses and casualty losses. The revenue windfall: $1.3 trillion over 10 years.

-- Revert to the capital gains approach that prevailed before 1987. Rather than taxing most gains at 15 percent as the current code does, the CBO plan would exclude 45 percent of gains from taxation and tax the remaining 55 percent at an individual's regular tax rate. New money raised: $48 billion over the next decade.

Where's all this headed? That depends. The mortgage-interest deduction has been a political no-go zone for decades. The same for local property-tax write-offs. But with billowing deficits and the need to raise trillions to help pay for health-care reform and the economic stimulus bills, somewhere, somehow, Congress is going to be pressed to raise revenue.

Even no-go zones could get new scrutiny.

Kenneth R. Harney's e-mail address is

© 2009 The Washington Post Company