The mortgage interest deduction remains on a list of tax breaks that could be cut by Congress as the Thanksgiving deadline for reducing the national debt by $1.5 trillion approaches. Opposition from real estate organizations to reducing or eliminating the deduction remains strong in the face of a fragile housing market and a weak economy.
Reducing the mortgage interest deduction “would crush the working class in resort areas and damage consumer confidence to buy a home in middle-class areas,” National Association of Realtors Chief Economist Lawrence Yun told attendees at the Northern Virginia Association of Realtors economic summit last month.
The association is concerned eliminating the deduction would significantly hurt middle-class families and increase taxes on homeowners who already pay 80 percent to 90 percent of federal income taxes. This share could rise to 95 percent if the mortgage interest deduction were eliminated.
The organization estimated changes to the deduction could erode home prices and the value of homes by up to 15 percent, hurting middle-class wealth accumulation and the $2.5 trillion tied up in home values nationwide — thereby jeopardizing recent progress toward stabilizing the housing market.
NAR President Ron Phipps said the deduction benefits primarily middle- and lower-income families, as some 65 percent of families who claim it earn less than $100,000 per year.
“It will definitely have a bad effect on housing and we’re not at a time that the market will sustain that — even in D.C. area,” said Adrian Hunnings, president of the Greater Capital Area Association of Realtors. “It will have an even more devastating effect on the rest of the country.”
Mark A. Calabria, director of financial regulation studies at the libertarian Cato Institute, said he does not expect the mortgage interest deduction to go away in the next couple of years but said it could get into trouble farther down the road.
“I don’t see it in this political environment,” he said. “I’m not saying ‘zero chance,’ but I don’t see a Democrat in the Senate taking a hard vote until after the election. It’s not likely that they will run with this one — wholesale tax reform.”
Democrats like to protect the credit because it is mostly concentrated in high-cost areas like California, New York, Connecticut and New Jersey. Many Republicans view rescinding the deduction as a tax increase and therefore also oppose it, Calabria said.
Before joining Cato in 2009, Calabria spent six years as a member of the senior professional staff of the U.S. Senate Committee on Banking, Housing and Urban Affairs. He said long-term there likely will be tax reform and the mortgage interest deduction always is in the top three expenditures, estimated at $100 billion. “The mortgage interest deduction is such a big piece. It’s like trying to talk about the budget without including Medicare,” he said. “Someone will tackle it in the 2013-to-2015 time frame.”
The Obama administration’s fiscal 2012 budget included a proposal to trim the value of itemized deductions for higher-income households. Individuals earning at least $200,000 and couples earning $250,000 still could take all their deductions, including mortgage interest, but the value of the deductions would be capped at 28 percent instead of 35 percent.
Lawmakers have rejected proposals to change the deduction in the past.
Calabria estimated the effect of removing the deduction would be less than NAR’s projected 15 percent reduction in housing prices. He said a 5 percent decrease is more realistic because interest rates are at an all-time low. The higher the interest rate is, the higher the amount of the deduction and more downward pressure on prices.
“It’s cheaper to get rid of it now,” he said. “The impact on prices would be smaller.”
