Home Mortgage Interest Deduction Skirmish Mounting

Differing approaches to income tax reform on housing tax incentives came together at a House Ways & Means Committee hearing recently and it wasn't pretty. It would seem the weight of the varying views leans heavily toward preserving incentives (such as the Mortgage Interest Deduction – MID)… but with qualifications.

Gary Thomas, President of the National Association of REALTORS® (NAR) underscored what has been obvious for decades: That real estate is the most widely-held category of assets that American families own, and for many Americans, the largest portion of their family’s net worth.  He noted that while there is agreement that reform and revision to different portions of the individual tax code may be warranted, NAR remains committed to preserving the current law incentives for homeownership and real estate investment. (Translated: Leave the MID as-is.)

For emphasis, Thomas reminded lawmakers that American homeowners now pay between 80 and 90 percent of all federal income taxes. And to those who claim the MID only benefits “the rich,” he noted 75 percent of real property tax deductions in 2012 went to taxpayers with incomes of less than $200,000 (with the bulk of that figure applied to taxpayers with incomes under $100,000). This was according to an estimate prepared by the staff of the Joint Committee on Taxation.

The committee is studying a range of options, several of which would reduce or eliminate housing tax incentives in return for lower marginal tax rates.

On the other hand, Jane Gravelle, an economic specialist with the Congressional Research Service, outlined projected savings if tax incentives are eliminated. She said the most significant housing provisions are linked with owner-occupied housing, and notes a $75 billion increase in revenues by FY 2015 if the MID is eliminated. Ending the real property tax deduction would reap $30.4 billion, and exclusion of capital gains would produce $26 billion.

(REAL LIFE FACT: Savings from eliminating the MID for the entire nation roughly equate to the cost of ten B-1 bombers -or- extending federal unemployment benefits for a year -or- approximately the cost in federal aid for Super Storm Sandy -or- savings from streamlining the food stamp program officially known as the Supplemental Nutrition Assistance Program, or SNAP. Pick your poison.)

National Association of Home Builders' (NAHB) Robert Dietz told the committee to preserve the mortgage interest deduction and low income housing tax credits while reeling off a litany of what's been labeled as false assumptions about the MID.

"First, we frequently hear that few homeowners benefit from the mortgage interest deduction because itemization is required," Dietz said according to the NAR’s Real Estate News. "In fact, most homeowners will claim it. In 2009, 35 million taxpayers - or 70% of homeowners with a mortgage - claimed the mortgage deduction in that year."

Meanwhile, Mark Calabria, the Cato Institute's financial regulation expert, told the committee to develop a tax code with low-simple flat rates and few if any deductions. The conservative think tank recommends elimination of the MID and the local property tax deduction contending the MID doesn't have a significant impact on the homeownership rate. (Next up: Cato Institute says Earth flat.)

No matter how you slice it, the MID is among the most popular benefits in the tax law, and earlier attempts to revise it dissipated. Tax reform prospects this year are uncertain and depend on timing. If it is pushed into late 2013, lawmakers are likely to balance the benefits of action against the sense of the political landscape as they come into a crucial mid-term election. Politics entering the tax code fray? Oh p’shaw.