Hold onto your wallets, folks. The failure of the congressional “Super Committee” to specify ways the United States can reduce spending in the next ten years means that everything having to do with taxes is likely to be scrutinized in the effort to shore up national solvency.
Some say that the mortgage interest deduction —the biggest break available to many American taxpayers— is sacrosanct and not likely to be scrubbed. But there is the lingering memory of the time when interest on all debts, not just a home, could be deducted when tax preparation time came around. Interest on credit card debt, car loans, student loans and other large-ticket purchases could be taken out of the final tax tally. In the mid-1980s when they were eliminated, then-President Reagan pled for retention of the mortgage interest deduction or it may have met the same fate. Reagan defended the mortgage interest deduction as a factor in promoting home ownership, one of the prime elements, he claimed, of the “American dream.” The fact that those other interest benefits were axed is enough to make taxpayers wary as the debate heats up again.
The Joint Congressional Committee, in its widespread look at all the possibilities, noted that the mortgage interest deduction cost the country’s tax coffers some $90 billion in 2010. According to IRS figures, 51.1 percent of all homeowners in the United States claimed the deduction, while 31.6 percent did not have a mortgage and 17.3 percent didn’t claim the deduction. The loss of the deduction would be highly unpopular with a large portion of the population and it certainly would be a hard-fought battle.
Although American homeowners have come to expect this tax break, few comparable countries—Australia, Canada and Great Britain among them—do not provide their taxpayers this advantage. They might wonder what behavior the U.S. would be trying to encourage by removing the benefit. Rentals as a preference over home ownership?
Appearing before the U.S. Senate Committee on Finance recently, Robert Dietz, an economist and vice president of the National Association of Home Builders said removal of the home interest benefit would increase the disparity in economic income and cause further shrinkage in the middle class.
However, the deduction overwhelmingly favors the rich. The limits are quite high—up to $1 million on a mortgage’s value and an additional $100,000 for home equity loans. The amount that can be deducted does not fall as people’s incomes rise. Someone with two or three homes falling under the $1 million limit significantly benefits. It hasn’t become an open issue yet among the people who support movements such as the Occupy Wall Street line of thought, but it could if the tension between the haves and have- nots intensifies.
Most experts agree that in the current housing market, elimination of the mortgage interest break could exacerbate conditions that already are problematic. The effects of the deduction are not the same everywhere in the country, but the many factors that will enter into any debate on the matter tend to be emotional, especially among those who teeter on the edges of being able to afford a home.
Experts say there would be some trade-offs. A spokesperson for Moody’s Analytics noted that the tax deduction is written into the cost of a home. Its elimination would have a negative impact initially, especially in higher-end housing. On average, its demise would cost a taxpayer no longer able to claim the deduction about $2,400 a year in additional taxes.
No one knows where the current rancorous stalemate in Washington will lead. But it seems inevitable that the debate over finances portends study of every element of the current tax system. And the conversation in today’s financial atmosphere is likely to focus more on federal revenues than on what the mortgage interest deduction is supposed to accomplish in behalf of home ownership.
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