Even though both Republican and Democrats agree that simplifying the tax structure is imminent, they are both hedging on rolling back the deduction for home mortgage interest. It’s become a sort of sacred cow.
Ways and Means committee members see the deduction as a lifeline for those in the middle class and essential to help new home buyers achieve their dreams of ownership.
The mortgage deduction is not only popular but also expensive to maintain, however, lawmakers on both sides are reluctant to make radical changes to it. Considering the housing crisis, Dave Camp (R-Mich) of the Ways and Means committee mentioned “Real estate taxes require careful and thoughtful review and although the tax code is 10 times larger than the Bible, not all the code is bad.” The mortgage interest deduction has not been overhauled since 1986.
The tax break, according the JCT, will cost an estimated $364 billion between 2012-2016. Other expensive deductions, such as employer-sponsored health insurance, and the deduction for state and local income taxes do not see signs of being touched as well.
Camp wants to see an extensive review of the tax code with a target of reducing the top individual and corporate rate to 25 percent. Democrats are not buying it, saying it will shift the tax burden to the middle class. Camp is saying that the offsets needed to lower taxes don’t have to come from eliminating tax breaks but can come from other areas in the 1986 bill.
Both parties say that the majority of benefits (2 thirds in 2012) from the mortgage interest deduction go to households making less than $200,000. Only 14% came from households making over $200,000.
The goal, according to Rep. Richard Neal (D-Mass) of the Ways and Means committee, is to get people into home ownership. Rep Tim Griffin (R-Ark) says that “at its core, this benefits middle-class, working Americans.”
Gary Thomas, president of the National Association of Realtors, doesn’t agree that the deduction should cover second homes and that the amount of mortgage covered should be trimmed from $1 million to $500,000.
Eric Todar, a scholar from the Urban-Brookings Tax Policy Center is skeptical and believes that the deduction mostly allows those who don’t need a subsidy to buy a bigger home.
Only a quarter of the deduction benefits went to households making less than $100,000 in 2012, according the JCT and it’s only available to about 1/3 of households that itemize.
Mark Calabria of the Libertarian Cato Institute argues that the deduction gives consumers another opportunity to incur debt and that tax provisions that encourage home ownership should instead, incentivize home equity. Rather than be tied to a large mortgage, it’s more important own a home outright.
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