Mortgage interest tax break may be at risk
WASHINGTON — If you take mortgage interest tax deductions, the next 100 days could have significant financial implications for you because of Congress' new federal debt ceiling plan.
Though the compromise legislation itself involved no new taxes, it created an unusual mechanism — an evenly split, 12-member bipartisan super-committee — that could call for major cutbacks on real estate write-offs by Thanksgiving.
All it will take is a single vote by a lone senator or House member who breaks with his or her party to put the mortgage interest deduction into serious play.
Here is what's about to unfold and how it could affect you: The legislation signed by the president Aug. 2 calls for a two-step increase in the federal debt ceiling plus spending cuts of about $917 billion. It also created the Joint Select Committee on Deficit Reduction with the goal of slashing an additional $1.5 trillion from the deficit in the coming decade.
The committee is required to vote on a plan to achieve these objectives by Nov. 23, using revenue increases, spending cuts or a combination. To approve a final package of deficit cuts and extend the debt ceiling, all that will be needed is a simple majority: seven votes.
A compromise, among other things, might well involve new revenues — one of the lowest-hanging sources of which is the mortgage interest deduction. Lobbying groups who seek to preserve housing write-offs already are gearing up for battle on Capitol Hill. The National Association of Realtors sent an urgent alert to its 1.1 million members asking them to directly "engage their members of Congress on the importance of preserving real estate tax provisions" during the coming several weeks. Officials acknowledge that the super-committee's structure — with its guaranteed punishments for failure aimed squarely at Republicans (defense spending) and Democrats (social programs) — makes it more difficult than usual to influence the final outcome.
After decades of being considered politically sacrosanct, why are homeowner mortgage write-offs suddenly on the chopping block? No. 1 is sheer size. The congressional Joint Committee on Taxation estimates that the home mortgage interest deduction will cost the federal government $100 billion during fiscal 2011 and $107.3 billion in 2012. Between 2008 and 2012, the cumulative write-offs for mortgage interest are projected to total just under half a trillion dollars.
Among the options open to the super-committee: Lower the maximum mortgage amount eligible for interest deductions to $500,000 from the current $1.1 million; replace the deduction with a tax credit that would be usable by lower- and moderate-income owners as well as those with higher incomes; eliminate interest deductions on second homes; and phase out the deductibility of homeowner property tax payments.
Defenders of the write-offs argue that high levels of homeownership are essential to economic growth and social stability, and fully justify the tax system preferences they receive. National opinion polls regularly find widespread support for the write-offs, even among renters. Also, academic and trade group studies project that any abrupt, across-the-board reduction in the deductibility of mortgage interest would have a severe impact on home values, possibly sending them plummeting by as much as 15 percent.
Critics, on the other hand, consider the write-offs inherently unfair: They're skewed to benefit upper-income owners disproportionately, and are highly concentrated geographically along the West Coast, Northeast and Middle Atlantic.
Where's this debate ultimately headed? It's much too early to predict. But any way you look at it, real estate write-offs could be in greater political jeopardy in the next three months than they have been at any time in the past 25 years.
Kenneth R. Harney can be reached at email@example.com.