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Edging Toward the Fiscal Cliff

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Mortgage Deduction May Be on the Chopping Block

December 9th 2012

Foreclosure

Housing industry leaders are maintaining close ties with other groups seeking to protect their tax deductions targeted in deficit-reduction talks. The National Association of Home Builders is keeping in close contact with nonprofits and other groups that want to save tax breaks for itemized deductions, including charitable giving and mortgage interest. The groups similarly argue that changes, such as caps, on the deductions would severely affect economic growth by dampening interest in home purchases and reducing donations that would most profoundly affect those who benefit from services.

Jerry Howard, head of the National Association of Home Builders, said making any changes to the mortgage interest deduction in a year-end deal would have unintended consequences on a housing market that is sparking back to life. "It's a ludicrous concept," Howard stated. "This is the last thing Congress should be considering when what we're trying to do is stabilize the economy," he said.

Any thought of changing the policy needs to be thoroughly vetted, which Howard expects to happen in talks next year about comprehensive tax reform.

"It needs to be taken off the table," he said.

Liberal analysts, like the White House itself, are pushing for an increase in Bush tax rates on higher-income earners to wring out most of the revenue they want.

The administration has said, for instance, that a plan to cap deductions would raise in the neighborhood of $450 billion, short of the $800 billion offered by Speaker John Boehner (R-Ohio) in a fiscal cliff deal and well below the $1.6 trillion the administration originally sought.

"What is clear is that proposals that take tax rates off the table would threaten donations to universities, non-profit hospitals, social services providers, arts and cultural institutions and other nonprofit organizations," according to a White House blog post on Friday.

Robert Greenstein, the founder of the Center on Budget and Policy Priorities, said in a conference call this week that to get into the neighborhood of $1 trillion in revenues, what he thinks would be the minimum needed for a $4 trillion deficit-reduction package, Washington would need to get rid of all the tax breaks used by the wealthy.

“That would produce a policy that policymakers wouldn’t and shouldn’t pass,” Greenstein said.

On that same call, Peter Orszag, formerly Obama’s chief budget adviser, called for shifting mortgage interest and other deductions into tax credits. That, Orszag said, would be a fairer way to dole out the incentive, and also more economically efficient.

Regardless, Howard said the industry, which has struggled for years to regain its strength, has no appetite for changing the mortgage interest deduction in such a short time span.

Under the current set-up, higher earners get more benefits from tax deductions, because taxpayers get to deduct the amount of their tax rate. For instance, those in the 35 percent bracket get that same amount of deduction. Obama, in recent budgets, has called for capping the amount taxpayers can deduct at 28 percent.

“It's very clear that changing tax expenditures should be part of the solution,” Orszag said. “I think it’s widely appreciated that the system of tax expenditures that we have is inefficient and changes are warranted.”

Orszag also said that the idea of a deduction cap would likely hurt the charitable sector more than housing or other sectors.

A plan to cap deductions at $50,000 would disproportionately hit higher-earning households, Orszag said, with those taxpayers using the lion’s share of their deduction space on mortgage interest, state and local taxes and charitable write-offs.

And, Orszag added, it’s likely easier to change your pattern of charitable giving than to move into a less expensive house or somewhere with lower state and local taxes.

The former OMB chief also said studies suggest that the mortgage interest deduction appears to do more to raise home prices than it does to encourage new owners to buy.

But, given that the housing sector just now seems to be getting back on its feet, Orszag added that it would not be wise to significantly roll back the incentive for housing over the next year to year and a half.

“It would be awkward right now,” Orszag said.

Vicki Needham and Bernie Becker write for The Hill, from where this article is adapted.


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