Mortgage Deduction Needs a Closer Look
One thing that federal budget negotiators consider untouchable may deserve to feel the touch of reform and rethinking, though caution is in order.
We’re talking about the hallowed policy that allows homeowners to deduct the interest paid on their mortgages at income tax time.
Even passing mention of possibly tampering around the edges of that time-honored benefit is always sure to raise outraged cries.
After all, is there anything more closely tied to the American Dream than the concept that home ownership should be spread around as widely as possible — with, as the Bible says, “every man under his vine and under his fig tree”? And isn’t the ability to deduct interest payments on home mortgages a central factor in encouraging the widest possible home ownership among American families of all income levels?
Distorting the Marketplace
Well, maybe not, according to at least one expert who has conducted an exhaustive study of the subject. In fact, the deduction may well have the exact opposite of the intended effect.
Law professor Dennis J. Ventry, of the University of California in Davis, says the evidence strongly suggests that the deduction artificially inflates prices in the marketplace by making it possible for people to buy homes that they otherwise might not have been able to afford. This has to be considered one of the major factors that helped fuel the disastrous economic recession from which the nation is still trying to recover.
The deduction now applies to the interest homeowners pay on mortgages of up to $1 million, with another $100,000 allowed for interest paid on home equity loans. This system is said to cost the U.S. Treasury more than $100 billion a year. And much of that forgiven interest is paid by wealthy homeowners who could easily afford to buy the home without any assistance in the form of a deduction.
Well-Off Benefit Most
As a result, according to Ventry, taxpayers whose incomes exceeds $100,000 — who constitute just 12.4 percent of all those filing taxes — rake in nearly 80 percent of the benefits from the interest tax deduction.
One obvious way to inject some fairness into this grossly unbalanced situation — and to go a long way toward helping get federal deficits under control while not even addressing the question of raising tax rates — would be to clamp a cap on the amount of mortgage interest that can be deducted for any given home. There is also talk of taking a look at the deduction for mortgages on second homes.
It is important to note that liberal Democrats aren’t the only ones urging another look at the rules. The bipartisan Simpson-Bowles Commission offered ideas such as lowering qualifying debt to $500,000 and excluding second homes. Republican presidential nominee Mitt Romney also talked about the possibility of capping tax deductions.
The National Association of Realtors opposes any changes. Obviously, any modifications would have to be approached gradually and with sensitivity. But surely this particular tax break can no longer be considered a sacred cow.
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