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No more home mortgage deduction?

SHRINK IT

The rich get richer. The more money someone borrows to buy a house, the bigger the tax break. All mortgage interest on homes up to $1.1 million is eligible. Want a beach house? Interest paid on second homes is covered, too.

Wealthier Americans buy most of the vacation villas and million-dollar mansions. And they benefit far more from the mortgage interest tax break than poor and middle class families. This disparity should end, opponents of the deduction say.

The average mortgage interest break for people with income over $200,000 a year is about $5,000, according to the Treasury Department. Families with income between $50,000 and $75,000 save about $600.

What¡¯s more, almost half the homeowners with mortgages get no break at all. To get the break, taxpayers need to itemize their deductions. Many don¡¯t spend enough on interest and other deductible expenses to do so.

Residents of higher-income areas with more robust housing markets - big cities, especially along the Atlantic and Pacific coasts - are more likely to get a break than homeowners in poorer, rural areas.

¡°We want to spread the benefit out to many more people,¡± said former Florida Sen. Connie Mack, who chaired President Bush¡¯s Advisory Panel on Federal Tax Reform.

Last month, Mack¡¯s panel proposed eliminating the mortgage interest deduction and replacing it with a smaller tax credit which everyone, even people who do not itemize, could take.

Second-home purchases would no longer be eligible. And taxpayers could get a break only for mortgages up to the average price of a home in their area - $227,000 in poorer areas to a maximum of $412,000 in richer areas.

Some economists say scaling back the current tax break could help the economy. The mortgage interest deduction, property tax deductions and capital gains tax breaks on home sales provide a strong incentive to invest in real estate instead of the stock market. The stock market historically has been a stronger growth engine for the economy than real estate.

¡°The economic question, from a pure efficiency point of view, is whether you want those dollars to go to a place where they have the highest return and as a result generate the largest economic pie,¡± said Douglas Holtz-Eakin, director of the Congressional Budget Office. ¡°And the housing subsidy doesn¡¯t do that.¡±

KEEP IT

When a baseball game reaches the seventh inning, the umpire doesn¡¯t suddenly allow a batter only two strikes instead of three. A rule change in the middle of the game is unfair.

That¡¯s how real estate agents, homebuilders and many in Congress view scaling back or taking away the mortgage interest tax break.

They say middle-class families on tight budgets counted on those breaks continuing when they locked into long-term mortgages.

Long-term mortgages collect most of the owed interest in the early years. Young first-time homebuyers or people who recently purchased a new home get proportionally larger tax breaks than those deeper into their mortgage.
¡°The hardest-hit family under this plan will be the 18 million homeowners who bought homes within the past three years,¡± said David Pressly, vice president of the National Association of Home Builders.

Real estate agents say that because housing prices have grown faster than income along the East Coast in recent years, many first-time homebuyers need tax breaks to afford even a simple starter home.

Besides wreaking havoc on family budgets, industry groups also argue, getting rid of the mortgage interest deduction or replacing it with a less lucrative tax credit could drive home prices down.

Most buyers have a fixed amount of money they can spend for a home. The bigger the tax break for ownership, the more they can spend. The smaller the tax break, the less they can spend. Proposals that President Bush¡¯s tax reform panel put forth could send real estate values down as much as 15 percent, industry groups argue.

The panel also proposed eliminating deductions for second-home mortgages. That could hurt resort and beach communities in Florida, North Carolina, South Carolina and Virginia, industry economists said.

¡°If we were designing a tax system from scratch, it might make sense not to include it,¡± said Michael Carliner, an economist with the National Association of Homebuilders. ¡°But the process (of taking it away) would be so tremendously disruptive. There¡¯s no obvious way to make the change now.¡±