By PETER EAVIS
Chris O?Meara/Associated PressA home for sale in September in Riverside,
Fla. Limits on mortgage interest deductions are likely to be part of federal
budget talks.
A tax break that has long been untouchable could soon be in for some
serious scrutiny.
Many home buyers deduct their mortgage interest when assessing their tax
bill, a perk that has helped bolster the income of millions of families ? and
the broader housing market.
But as President Obama and Congress try to hash out a deal to reduce the
budget deficit, the mortgage interest deduction will likely be part of the
discussion.
Limits on a broad array of deductions could emerge in any budget deal. It
is likely that any caps would be structured to aim at high-income households,
and would diminish or end the mortgage tax break for many of those
taxpayers.
?This is definitely a chance worth jumping for,? said Amir Sufi, a
professor at the Booth School of Business at the University of Chicago. ?For a
fixed amount of revenue, it?s better to remove deductions than increase marginal
tax rates.?
Such a move would be fiercely opposed by the real estate industry. The
industry has played a crucial role in defending the tax break, even as other
countries with high homeownership have phased it out.
Housing market players who oppose any whittling down of the mortgage
deduction still have plenty of time to press their case before Congress makes a
decision. If President Obama and Congress do manage to reach an agreement to
avoid the looming tax raises and spending cuts, their deal will be broad in
nature. Then, over the following months, Congress will hash out details, like
any caps on deductions.
?Until Congress introduces specific legislation, there?s nothing to say
about any proposed changes to the mortgage interest deduction,? Gary Thomas,
president of the National Association of Realtors, said in an e-mailed
statement. ?However, it has always been the N.A.R.?s position that the mortgage
interest deduction is vital to the stability of the American housing market and
economy, and we will remain vigilant in opposing any future plan that modifies
or excludes the deductibility of mortgage interest.?
One of the reasons the mortgage tax break is so vulnerable is that both
Democrats and Republicans have recently favored capping deductions, including
both President Obama and the recent Republican presidential nominee, Mitt
Romney.
What is more, deductions could be used to grease a compromise in the budget
negotiations. High earners would be hit most by deduction limits, something that
might make Republicans recoil. But the party may tolerate such a policy in
return for a deal that limits how much actual tax rates go up for high-income
households.
Taken on its own, the deduction limit wouldn?t make a huge difference. But
it can play an important role in a broad plan to cut the deficit, and shows a
willingness to tackle once sacred cows. The tax numbers suggest it may not be
hard to structure deduction limits in a way that leaves most middle-income
households untouched.
With the mortgage interest deduction, households realized tax savings of
$83 billion in 2010, according to figures from the Reason Foundation. The bulk
of those savings are enjoyed by the higher earners.
There are a range of ways to increase tax revenue by aiming at higher
earners, some less comprehensive than others. For instance, the interest
deduction relating to second homes could be ended. Also, the cap on mortgage
debt eligible for the interest rate deduction ? currently $1 million ? could be
reduced.
There are broader approaches, too. In its proposed budget, the Obama
administration plans to focus on top earners. The administration suggests
capping deductions at 28 percent for high-income households, those earning more
than $250,000.
Under the current rules, a high-earning household deducting $20,000 in
interest payments would probably apply a 35 percent rate to that amount and
receive $7,000 in tax savings. The Obama budget aims to limit that tax saving by
capping that rate at 28 percent. If that rate were applied to $20,000 of
interest payments, the saving would fall to $5,800.
The United States would capture the difference. Over the next 10 years,
that 28 percent cap could increase tax revenue by $584 billion, according to the
Treasury Department.
Separately, the Obama administration also wants to limit high earners?
deductions by letting certain Bush-era exemptions expire. Altogether, the
Treasury Department thinks it could raise $749 billion over 10 years by limiting
deductions for higher earners. That?s substantially more than the $684 billion
it thinks it could raise from increasing their tax rates.
Still, there are situations where certain middle-income earners do get hit
by deduction limits.
Consider a policy that uses a dollar limit, and caps all deductions at
$35,000. That amount would be plenty to cover most middle-income households?
mortgage interest, state and local taxes and charitable giving.
But people earning more than $100,000 may start to reach the limit,
according to Sidney B. Rosenberg, associate professor emeritus at the University
of North Florida. He assumes a household earns $110,000 and has a $300,000
mortgage on which it pays $17,500 a year. It also pays property taxes and state
taxes at estimated nationally average rates. Such a family would have nearly
$35,000 of deductible expenses, Dr. Rosenberg calculates.
One argument against curtailing the mortgage deduction is that it could
reduce demand for housing, depressing home prices when the housing market is
still somewhat weak. The National Association of Realtors believes a removal of
the deduction could reduce property values by 15 percent, according to a
presentation last year from its chief economist, Lawrence Yun.
Other analysts say they believe the housing industry overstates the
potential impact. With several forms of government subsidy also supporting
housing, it?s hard to single out the effect of the mortgage deduction. At the
most, the Reason Foundation estimates, the deduction may bolster house prices by
3 percent.
Since any deduction cap is likely to aim at higher earners, expensive
houses would be most affected. But big-ticket homes appear much more resilient
to shocks than lower-cost dwellings.
CoreLogic, a housing data company, tracks data that effectively divides the
market into higher- and lower-cost houses, grouping them based on the size of
the mortgages. The prices of the higher-cost houses are up 5.9 percent since the
start of 2005, before the housing crash. In contrast, the houses at the lower
end have fallen 13.5 percent in price since the beginning of 2005.
Given the apparent sturdiness of the higher end of the housing market,
politicians may decide there are few risks in effectively capping mortgage
deductions for high earners. Limiting tax breaks in a way that could reduce
mortgage relief would be a change for Washington, which has done so much to
support housing.
Nick Kasprak, an analyst at the Tax Foundation, said that up until recently
he didn?t expect to see a cap on deductions. ?But now,? he said, ?it seems both
parties are open to pursuing this strategy.?
A version of this article appeared in print on 11/27/2012, on page B1 of
the NewYork edition with the headline: A Tax Break Once Sacred Is Now Seen As
Vulnerable.
Submitted by : Claire Golaszewski
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