Social Security may be the third rail of American politics, but the mortgage interest deduction is the equivalent of an electrified apple pie.

Under periodic and unsuccessful attack since the Reagan years, this rule allows homeowners to deduct interest on home mortgages (including, with certain restrictions, second mortgages and home equity loans) up to $1 million, and also the property taxes on those homes. Deductions are also available for second homes that are, however infrequently, owner occupied. That deduction can also be taken for boats and possibly other "residential" vehicles that function as primary or second homes.



This deduction is estimated to cost the U.S. Treasury some $63 billion in revenues as taxpayers claim some $337 billion in home mortgage interest deductions each year.

But earlier this month, President Bush's Advisory Panel on Federal Tax Reform made recommendations, to eliminate this deduction for persons paying interest on larger mortgages, possibly those exceeding $250,000 to $350,000. At the Panel's final meeting on October 17 the limit was set at $313,000, the current maximum limit for Federal Housing Administration loan guarantees, an FHA amount that varies by location. The panel has also recommended the elimination of the deduction for residential property taxes.

Other panel recommendations included the elimination of the alternative minimum tax (a change which might offset the elimination of the mortgage deduction for many people), the elimination of the deduction of state and local taxes (aside from the property tax change noted earlier;) make dividends to shareholders from U.S. tax-paying corporations tax free, and reduce long term capital gains rates to some indeterminate amount significantly under 10 percent.

The head of the Panel, former Florida Senator Connie Mack stated that the proposed change is a long way from firm and that he hoped the final proposal will take into account local home prices in such a way as to encourage rather than discourage home ownership. He also said that persons who choose to buy extremely expensive homes are not going to get the tax breaks that they have in the past.

In the midst of news about Katrina/Rita, the actual or possible indictment of half of the federal government, and Saddam's trial, this news picked up very little traction in the broadcast media, but the recommendations have finally surfaced in the public consciousness and interest and attention are growing.

And of course forces are lining up on either side of the issue.

Among the arguments that supporters of the proposal put forth:

  • Limiting the deduction would provide much needed revenue to the U.S. Treasury to help meet the growing deficit caused by other tax cuts, the war in Iraq, and the looming costs of recovery from the Gulf hurricanes.
  • The current mortgage interest deduction encourages people take on added debt, sometimes only in order to spend more on consumption such as enabled by home equity loans.
  • The deduction discriminates against renters and even against those with lower rates of mortgage indebtedness; and, as currently structured, it is merely another tax benefit fully available only to those with the means necessary to buy a home requiring a $1 million mortgage.
  • Such a change would allow the government a mechanism to slow down a runaway situation which is pricing millions out of the housing market. This argument holds that the only other mechanism currently available, raising short term interest rates, has failed to stop or even slow down rising house prices.

On the side of those who view such a change with horror, the arguments against such a proposal include:

  • The initial maximums suggested (while only tentative proposals at this time) would not allow homeowners in high-priced markets such as San Francisco, Boston, New York, or parts of south Florida to deduct interest payments on the mortgage needed to buy even a median priced home.
  • Therefore, it follows that these are medium income buyers who would, again, be adversely affected by changes in the tax code.
  • The proposal would generally discourage homeownership.
  • The housing market along with the construction industry has been driving the U.S. economy for some time. Such a proposal, if implemented, might bring the housing industry and the construction industry to a screeching halt, seriously undermining the overall economy.
  • As a parallel to the above argument about the deduction encouraging debt and thus consumption; its elimination could severely impact consumer spending and thus hamper the fragile economic recovery.
  • The change would negate any benefits to the middle class from the similarly recommended elimination of the widely reviled Alternative Minimum Tax which has begun to increasing impact those tax brackets.

And there is always the argument that it is unfair to change the rules after people, in good faith, made purchases under financial considerations guided by those rules.

The lobbyists and associations most likely to be impacted by this proposed change were on the case and have begun to howl in outrage. Among the loudest are The National Association of Realtors, National Association of Homebuilders, and the Mortgage Bankers Association. All have sent letters to the panel or made public statements objecting to the proposed change, pretty much along the grounds listed above.

Two Florida Congresspersons, (Robert Wexler, D-Delray Beach and Katherine Harris, R-Sarasota) who generally do not agree on much of anything, filed a non-binding resolution on October 20 urging the panel to leave the $1 million cap alone.

The removal of the home mortgage deduction has been proposed before, going back, as we said earlier, to the 1980s and has always met strong resistance in Congress. The panel making the current recommendation is reporting to the President and it will be interesting to see if he views this suggestion as a tax increase or a needed reform.

READ PART TWO OF THIS ARTICLE