August 8th, 2011 8:22 AM by Lehel S.
Just as Social Security and Medicare benefits were dangled above the shredder in the debt ceiling debate, another of Washington's sacred cows could end up on the chopping block soon as well.
The mortgage interest deduction, which allows 35 million homeowners to write off their mortgage interest payments, may be in for serious restructuring if ongoing efforts to pare the bulging federal debt are broadened.
As part of the just-concluded debt ceiling debate, a bipartisan group of senators known as the "Gang of Six" proposed lowering the limit on mortgages eligible for the deduction from $1 million to $500,000 and restricting the tax break only to primary residences.
But as it has through decades of federal budget cuts and crises, the popular provision emerged unscathed in the debt limit compromise that President Barack Obama signed into law Tuesday. That reprieve, however, may not last.
With lawmakers looking for $1.2 trillion to $1.5 trillion in additional budget cuts by the end of the year, the deduction – which will cost the federal treasury about $131 billion next year – makes for a juicy target.
First of all, the revenue the government forgoes because of the deduction is huge: more than twice the entire budget of the Department of Housing and Urban Development. And there are better, more cost-efficient ways for the tax code to encourage homeownership, economists argue. Plus, the benefits of the deduction go disproportionately to the upper middle class, whose bigger homes and mortgages bring bigger tax write-offs.
In fact, the average value of the deduction increases with income, from $91 for those who make less than $40,000 a year to $5,459 for those who earn more than $250,000, according to a 2010 report by the Tax Policy Center, a joint project of the Urban Institute and the Brookings Institution, two center-left research centers.
The idea of curbing the mortgage tax break has been around for years. President George W. Bush's tax overhaul panel recommended limiting the deduction in 2005, but the issue quickly disappeared as lawmakers showed no stomach for it.
The recent recession may have changed that, however. As federal revenue plummeted, calls to trim and revamp the deduction have came from the Bipartisan Policy Center's Debt Reduction Task Force and President Barack Obama's National Commission on Fiscal Responsibility and Reform.
"While nothing has happened in response to any of these ideas, it is definitely now on the table as it has never been before," said Eric Toder, a co-director of the Tax Policy Center.
So don't be surprised if the deduction is back when a new 12-member bipartisan debt-reduction legislative committee must recommend even more budget cuts.
At an estimated $484 billion from 2010 to 2014, the mortgage deduction is second only to the employer-paid health insurance exemption as the most costly individual tax break, according to the congressional Joint Committee on Taxation.
A study by the libertarian Reason Foundation suggests eliminating the deduction altogether to fund a revenue-neutral 8 percent cut in federal taxes for everyone.