Can mortgage interest deduction be changed?

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Posted: Saturday, April 6, 2013 12:00 am

U.S. lawmakers are looking for ways to carve up the $70 billion-a-year home mortgage interest deduction.

What they’re finding is a political challenge that might not yield much revenue for reducing the budget deficit or lowering tax rates and may not be worth the outcry from taxpayers making between $75,000 and $200,000 a year.

Ideas are being discussed to curtail the benefit without ending it. Options include lowering the $1 million cap on the size of deductible loans, eliminating the benefit for second homes and imposing limits on top earners’ itemized deductions, including mortgage interest.

Still, any plan that generates significant revenue would pinch the housing industry and upper-middle-class voters. Real estate agents and homebuilders are in every congressional district, and more than half the benefits of the tax benefit go to households earning between $75,000 and $200,000, the homeowners both parties are pledging to protect.

“It’s so woven into our economy that it’s hard to do without having economic dislocation that produces more pain than the revenue gained,” said former U.S. Rep. Earl Pomeroy, a North Dakota Democrat.

In 2011, 36 million households claimed $359 billion in mortgage interest deductions, according to the Internal Revenue Service. That was down from 37 million and $387 billion the year before.

The most detailed discussions are happening in the House of Representatives, where the tax-writing Ways and Means Committee has broken into 11 bipartisan working groups to study ways to rewrite the U.S. tax code. The groups are wrapping up their work by April 15.

The committee plans to release and pass a bill this year. Republicans emphasize their willingness to consider anything while not yet proposing anything specific.

“I don’t think the committee knows where tax reform is headed, or how broad it will be,” Jamie Gregory, a lobbyist for the National Association of Realtors who has been invited to working group meetings, said. “It’s a difficult issue with a lot of moving pieces.”

Narrower options, such as ending the deduction for second homes, could raise about $8 billion a year. Converting the deduction into a 15 percent credit and capping indebtedness at $500,000 would yield $24 billion a year by 2019 and cause about half of households earning between $100,000 and $200,000 to pay more tax, according to the nonpartisan Tax Policy Center.

Changes limited to the top 2 percent of earners or reductions to the $1 million cap would have the biggest effect in high-cost real estate markets.

What’s important is how the deduction fits in a tax plan designed to lower rates and promote U.S. economic growth, said U.S. Rep. Diane Black, a Tennessee Republican on the Ways and Means Committee who said the second-home deduction is under scrutiny.

“The best thing for folks to get to be able to afford a house is a job and higher wages,” she said.

The mortgage interest deduction is a long-standing feature of the tax code and a survivor of the 1986 rewrite that prohibited taxpayers from deducting credit-card interest.

It’s available only to the one-third of U.S. taxpayers who itemize their deductions.

The tax benefit’s defenders warn that scaling it back could discourage homeownership, causing home prices to drop with ripple effects in the construction, furniture and appliance industries whose fortunes rise and fall with the housing market.

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