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To battle deficit, mortgage interest deduction may be on chopping block

Deficit may eat into deduction for home mortgage interest

WASHINGTON — Could the forthcoming report of a bipartisan presidential deficit-reduction commission, due Dec. 1, lead to fundamental changes in the way homeownership is treated by the federal tax system?

Are you kidding? For decades the political rule on Capitol Hill has been that nobody messes with homeowners' tax benefits — mortgage interest deductions, capital gains exclusions, property tax write-offs — even if they cost the government hundreds of billions of dollars in tax revenues a year and increase the federal deficit.

But now the sheer size of the country's fiscal problems — a $1.3 trillion deficit for 2010 and a fast-mounting $13.6 trillion debt overall — could be slowly altering the equation. Not only are some Republicans and Democrats joining in support of plans to lower the deficit through across-the-board cuts in defense spending, social programs and tax subsidies, but even leaders in the real estate industry are speaking up.

At an opening session Oct. 14 of the annual fall meeting of the Urban Land Institute here, all five of the panelists — Democrats and Republicans — agreed that although continuing tax system support for housing is important, the current mix of tax incentives is costly and imbalanced — favoring homeownership disproportionately.

At a private meeting following that session, one of the panelists, Henry G. Cisneros, secretary of housing and urban development during President Bill Clinton's first term, said serious leaders on both sides of the political aisle increasingly think that the weight of public debt — plus the hundreds of billions of dollars per year required to make interest payments to creditors — could wreck the economy within the decade.

"This is a catastrophe looming," said Cisneros, citing a Congressional Budget Office estimate that the public debt will amount to 69 percent of the national gross domestic product by 2020 — hobbling the country with $778 billion in annual interest payments simply to service that debt.

Since leaving public office, Cisneros has been in the housing development industry and is executive chairman of realty investment company CityView. Though Cisneros has long been an ardent proponent of homeownership, he now thinks that the real estate and housing industries must be willing to contribute their fair share to any "comprehensive long-term plan" to balance the budget.

J. Ronald Terwilliger, the former CEO of giant developer Trammell Crow Residential and a contributor to some Republican campaigns, agreed that federal tax incentives for ownership should be throttled back — "a phased-in reduction" over a period of years so as not to worsen an already-strained housing market.

Steve Preston, the last secretary of HUD under George W. Bush, suggested that a "comprehensive policy" covering all key sectors of the economy stands the best chance of gaining the broad political support needed to push a deficit-reduction and balanced budget program through a fractious Congress.

In theory at least, that is what the National Commission on Fiscal Responsibility and Reform is supposed to deliver to President Barack Obama six weeks from now. The 18-member commission is co-chaired by former Republican Sen. Alan Simpson of Wyoming and former Clinton White House chief of staff Erskine Bowles, and has been holding hearings and gathering deficit-reduction ideas since February. Most of the commissioners are current members of Congress, but the group also includes representatives of private industry and labor. Though the commission has provided no public hints of where it is headed, housing analysts say it's inevitable that it will propose cutbacks to tax subsidies for real estate.

Likely targets: The mortgage interest deduction, which added about $100 billion to the deficit in fiscal 2010 and more than $400 billion during the last five years, according to congressional estimates; capital gains exclusions for home sale profits, which cost more than $128 billion between fiscal 2006 and 2010; and property tax write-offs, which cost $70 billion-plus during the same period.

Though virtually no one in the real estate industry supports elimination of tax benefits for homeownership, many economists and deficit-reduction experts say some form of cutbacks will be essential to help balance the budget at some point.

Robert L. Bixby, executive director of the nonpartisan Concord Coalition, which advocates for deficit reduction, says write-offs such as the mortgage interest deduction could be reduced significantly below the current $1.1 million loan amount maximum without diminishing the financial attractiveness of homeownership for the vast majority of consumers.

But is any of this politically doable? Tough question, but the answer is: not unless the deficit-reduction commission comes to Congress with a powerful and skillfully balanced set of recommendations that require concessions from every interest — real estate included — in order to meet the larger goal of rescuing the economy from debilitating debt.

Kenneth R. Harney can be reached at kenharney@earthlink.net.

To battle deficit, mortgage interest deduction may be on chopping block 10/22/10 [Last modified: Friday, October 22, 2010 5:30am]
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