Back in November we reported that The President's Advisory Panel on Federal Tax Reform had submitted recommendations to then Treasury Secretary John Snow. Principal among the panel's suggestions were the elimination of federal income tax deductions for state and local taxes which would include the current deduction for local property taxes and the replacement of the current deduction for interest payments on home mortgages of up to $1,000,000 with a tax credit of 15 percent of the mortgage interest paid. The Panel maintained that this change would actually be advantageous to low and middle income homeowners although comments received on this website from those who made the computations based on their own circumstances did not concur, at all! The recommendations would pretty much do away with any deduction for a second owner occupied vacation home which, with some restrictions, is allowed under the current tax code.



Under current rules, itemizing taxpayers can deduct interest and origination points on home loans and on equity lines of credit for both first and second (vacation) homes up to a total of $1,000,000 in value, and properties taxes on both, even if paid in a foreign country.

This is not the first time these deductions have been placed on the chopping block and this time the recommendations pretty much evaporated in the face of heavy opposition, but a study released recently by the National Association of Home Builders illustrates the bonanza that awaits the federal treasury if such changes were to take place.

The publication "Local Use of the Mortgage Interest and the Real Estate Tax Deductions" by Robert Dietz, Ph.D. analyzes, on a micro basis, the benefit to taxpayers and the cost to the treasury of these deductions.

Using data from 2003 tax returns and the 2000 census, the study computes tax payer savings (or treasury losses depending on your perspective) on a federal, state, and congressional district level. The numbers are astounding.

For starters, while study is using the 2003 figures, it quotes The Congressional Joint Committee on Taxation as estimating that the value of the mortgage interest deduction to taxpayers this year will be $69.4 billion and the deduction for real estate taxes is equal to $19.9 billion.

In 2003, 35 million taxpayers used the home mortgage deduction, deducting an average of $9,650 for each filer and 39 million taxpayers took the real estate tax deduction with an average of more than $3,000 per filer. These are the most widely used deductions under the federal tax code.

Jerry Howard, executive vice president and CEO of NAHB stated that "Because Mortgage interest and real estate deductions significantly reduce federal tax liabilities for home owners, they are important tools for promoting homeownership. The report shows that millions of working families across the nation use and depend upon these important tax incentives to help them maintain their current standard of living."

The study states that the average congressional district - and there are 435 of them - contains roughly 80,000 taxpayers who claim the mortgage interest deduction and 88,000 who take advantage of the property tax deduction.

While congressional districts are designed to contain roughly the same number of citizens, the deductions are not utilized evenly across the congressional districts or the states. The six districts with the smallest number of taxpayers claiming the mortgage interest deduction, for example, are all located in New York City where people overwhelmingly rent. The 6th Congressional District of Colorado which encompasses the outlying areas and suburbs of Denver contains the highest number of taxpayers who claim the mortgage interest deduction, approximately 153,000. The fast-growing suburbs of Atlanta, New York, and Washington, DC also rank high in the number of residents taking advantage of the benefit. California has 4.6 million mortgage interest claiming taxpayers while Wyoming, one of the least populous states, has the fewest at 36,000. (The entire state of Wyoming may lack the total number of residents necessary to actually constitute a congressional district.)

The 14th district of California, which contains parts of San Mateo, Santa Clara, and Santa Cruz counties and is home to Silicon Valley, ranks number one in the cash value of the mortgage interest deduction, $3.2 billion. The State of California is tops among the states as well; the mortgage deduction statewide is estimated at $65 billion. On the other end of the scale is North Dakota at $260 million.

Across all districts the average amount of the deduction for mortgage interest is $9,500 but the 14th district of California again leads with an average of $35,000. The state also has the highest average deduction, $14,000, while Oklahoma has the lowest at $5,700.

Real estate tax deductions averaged a bit less than $3,000 per household nationwide and were highest in New York's 18th district which includes fabled Westchester County. The average tax deduction there was $12,000. The western suburbs of Houston, Texas in the 7th congressional district were second with an average of $8,900. Alabama had the bottom to itself - taxpayers in its 2nd, 3rd, and 4th Congressional districts claimed an average of $550 to $675 in real estate taxes. Coming in last is not necessarily a bad thing.

New York's 3rd congressional district, comprised mainly of the eastern half of Nassau County (Long Island) had the largest aggregate amount of real estate tax deductions - $1.25 billion. In fact, New York and New Jersey districts with suburban demographics comprise the top nine districts in terms of total real estate deductions while the lowest levels of deductions were found in the renter-dominated city itself. California led the states with total deductions of 12.5 billion and Wyoming was last with total taxes deducted at $65 million.

With these kinds of numbers in play, it will be remarkable if the real estate tax and mortgage interest deduction benefits do not soon come into play again as the government struggles to deal with skyrocketing deficits. Using a rough average tax number of 15 percent, the elimination of the real estate tax deduction would result in additional taxes of $2.98 billion and doing away with the mortgage interest deduction (without any adjustment such as the 15 percent tax credit suggested by the panel) would bring in an additional $10.41 billion. Next we hope to see a study projecting the disruption such a massive change would bring to the housing market and to the currently thriving state of homeownership.