Commission Proposes Scaling Back Mortgage Interest Tax Deduction; Housing Advocates Push Back

Last week the co-chairs of the National Commission on Fiscal Responsibility and Reform — a non-partisan task force faced with coming up with creative and fair ways to reduce federal spending, reduce national debt and balance the budget — proposed scaling back the mortgage interest tax deduction among its various ideas in a 50-page proposal.

The commission, put into existence by President Obama in February, presented an entire tax reform section, with the goal of broadening the tax base, simplifying the tax code and improving compliance. One of the options included reducing the mortgage interest benefits to 80% of their current level and another option suggested limiting the mortgage tax deduction to exclude second residences, home equity loans, and mortgages over $500,000. Another idea would be to tax dividends and capital gains at the ordinary rates. The commission claimed this plan could reduce the deficit by nearly $4 trillion through 2020.

Michael D. Berman, CMB, chairman of the Mortgage Bankers Association, last week issued a statement reacting to options contained within the draft proposal.

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“Given the fragile state of the nation’s housing market, now is not the time to be scaling back incentives for homeownership,” said Berman. “The mortgage interest deduction is one of the pillars of our national housing policy, and limiting its use will have negative repercussions for consumers and home values up and down the housing chain.”

“We are also concerned about proposals to tax dividends and capital gains at ordinary tax rates, which would seriously impact investment in commercial real estate. We share the widespread concern over the growing national debt and want to help identify reasonable solutions, but we cannot support proposals that would chip away at the foundations of the real estate market.”

The home mortgage interest tax deduction has been around since 1913 and allows homeowners to deduct all mortgage interest from their federal tax bill; it is considered to be an incentive for prospective homeowners. Yet various sources report this policy will cost the federal government approximately $130 billion in 2012. Tax reform advocates have proposed deleting the deduction in the past.

To view the commission’s complete report, see here.

Written by Clare Pierson