By Brian Summerfield, Online Editor, REALTOR® Magazine
When a draft version of the deficit reduction commission’s recommendations leaked to the press a few weeks ago, some observers used its release as an opportunity to pounce on the mortgage interest deduction (MID).
For instance, David Kocieniewski of The New York Times said, “The home mortgage deduction is one of the most widely used and expensive tax subsidies … Its size, popularity and link to the emotionally charged American notion of homeownership has made it so politically sacrosanct that there are serious doubts whether Congress will even entertain the idea,” and added that, “tax policy experts say that for all its popularity, the value of the deduction in public policy is debatable … Critics of the subsidy also argue that, despite its broad support, the benefits from the mortgage interest deduction flow disproportionately to the wealthy.”
Now, commentators of all political persuasions are reacting to various parts of an updated plan — including, once more, changes to the MID — that was unveiled this morning by commission co-chairs Alan Simpson, a former Republican Senator from Wyoming, and Erskine Bowles, who served as White House Chief of Staff under President Clinton. Specifically, they suggest:
- Converting the MID to a 12 percent non-refundable tax credit.
- Capping the mortgage amount at $500,000 (the current amount is $1 million).
- Eliminating credits for second residences and home equity.
It’s important to note that this not an official plan — yet. It’s intended to be an illustration of a tax system with some popular deductions removed. At this point, the sole formal recommendation is to limit the MID to principal residence. (Note: The co-chairs also advocate eliminating most or all tax expenditures, which could mean that the $250,000/$500,000 exclusion on the sale of a principal residence would go away, thus putting home sellers in a higher tax bracket the year they sell their houses.) The 18-member commission was supposed to vote on these recommendations today, but it was announced that they’ll postpone the vote until this Friday; any recommendation that will be formally made to President Obama must be approved by at least 14 members.
Interestingly, Simpson recently told NPR that he was worried about the resistance the National Association of REALTORS® would put up on potential elimination of the MID. “[T]hey’re going to kill this baby flat,” he said.
That effort has arrived. In a statement issued today, NAR President Ron Phipps said, “The tax deductibility of interest paid on mortgages is a powerful incentive for home ownership and has been one of the simplest provisions in the federal tax code for more than 80 years. In a new survey commissioned by NAR and conducted online in October 2010 by Harris Interactive of nearly 3,000 homeowners and renters, nearly three-fourths of homeowners and two-thirds of renters said the mortgage interest deduction was extremely or very important to them.”
Moreover, tampering with the MID at this critical time in the housing market could threaten its emerging recovery, said Phipps, and added that NAR would “remain vigilant” in its opposition to any recommendations to change or get rid of it.
“Recent progress has been made in bringing stability to the housing market and any changes to the MID now or in the future could critically erode home prices and the value of homes by as much as 15 percent, according to our research,” he explained. “Any further downward pressure on home prices will hamper the economic recovery, raise foreclosures and hurt banks’ abilities to lend and likely tip the economy into another recession resulting in further job losses for the country.”
Update: Members of the deficit commission voted 11-7 in favor of the plan on Friday, Dec. 3, but fell short of the 14 votes needed to send the recommendation to Congress. Simpson and Bowles appear to be pleased with the result, however, and predicted that parts of the plan would be included in future legislation.