If you take mortgage interest tax deductions, the next 100 days could have significant financial
implications for you, thanks to Congress’ new federal debt ceiling plan.
Though the compromise legislation itself involved no new taxes, it created an unusual
mechanism — an evenly split, 12-member bipartisan super-committee — that could call for
major cutbacks on real estate write-offs by Thanksgiving.
All it will take is a single vote by a lone senator or House member who breaks with his or her
party to put the mortgage interest deduction into serious play.
Here is what’s about to unfold and how it could affect you: The legislation signed by the
president Aug. 2 calls for a two-step increase in the federal debt ceiling plus spending cuts of
about $917 billion. It also created the Joint Select Committee on Deficit Reduction with the goal
of slashing an additional $1.5 trillion from the deficit over the coming decade.
The committee is required to vote on a plan to achieve these objectives by Nov. 23, using
revenue increases, spending cuts or a combination. If the committee members cannot agree on
a plan or if either house of Congress votes it down, automatic and severe spending cuts of $1.5
trillion will be imposed equally on the Department of Defense and domestic programs including
Medicare provider payments.
The structure of the committee is akin to a jury room rigged with high-power explosives if
the jury fails to reach a verdict. Membership consists of six Republicans and six Democrats —
three each from the Senate and House — chosen by party leaders. To approve a final package
of deficit cuts and extend the debt ceiling, all that will be needed is a simple majority — seven
House and Senate leaders selected their six members this past week: Democratic Sens. Patty Murray (Washington), Max Baucus (Mont.) and John Kerry (Mass.); Democratic Reps. James E. Clyburn (S.C.), Xavier Becerra (Calif.) and Chris Van Hollen (Md.); Republican Sens. John Kyl (Ariz.), Pat Toomey (Pa.) and Rob Portman (Oh.); and Republican Reps. Jeb Hensarling (Tex.), Dave Camp (Mich.) and Fred Upton (Mich.).
The selections appear to include members who have taken stances in the past that are consistent with party positions — Democrats typically favor revenue increases to help close the deficit, whereas Republicans generally want to slash spending without raising taxes. However, there is a real possibility that one or more members on either side could be concerned enough about the prospect of painful automatic defense or social-program spending cuts that they would go with their conscience and break party ranks.
That compromise might well involve new revenues — one of the lowest-hanging sources of
which is the mortgage interest deduction. Lobbying groups who seek to preserve housing write-
offs already are gearing up for battle on Capitol Hill. The National Association of Realtors sent
an urgent alert to its 1.1 million members asking them to directly “engage their members of
Congress on the importance of preserving real estate tax provisions” during the coming several
weeks. Officials acknowledge that the super-committee’s structure — with its guaranteed
punishments for failure aimed squarely at Republicans (defense spending) and Democrats
(social programs) — makes it more difficult than usual to influence the final outcome.
After decades of being considered politically sacrosanct, why are homeowner mortgage write-
offs suddenly on the chopping block? No. 1 is sheer size. The congressional Joint Committee
on Taxation estimates that the home mortgage interest deduction will cost the federal
government $100 billion during fiscal 2011 and $107.3 billion in 2012. Between 2008 and 2012,
the cumulative write-offs for mortgage interest are projected to total just under half a trillion
Among the options open to the super-committee: Lower the maximum mortgage amount
eligible for interest deductions to $500,000 from the current $1.1 million; replace the deduction
with a tax credit that would be usable by lower- and moderate-income owners as well as
those with higher incomes; eliminate interest deductions on second homes; and phase out the
deductibility of homeowner property tax payments.
Defenders of the write-offs argue that high levels of homeownership are essential to economic
growth and social stability, and fully justify the tax system preferences they receive. National
opinion polls regularly find widespread support for the write-offs, even among renters. Also,
academic and trade group studies project that any abrupt, across-the-board reduction in
the deductibility of mortgage interest would have a severe impact on home values, possibly
sending them plummeting by as much as 15 percent.
Critics, on the other hand, consider the write-offs inherently unfair: They’re skewed to benefit
upper-income owners disproportionately, and are highly concentrated geographically along the
West Coast, the Northeastern states and mid-Atlantic.
Where’s this debate ultimately headed? It’s much too early to predict. But any way you look
at it, real estate write-offs could be in greater political jeopardy in the next three months than
they have been at any time in the past 25 years.
Ken Harney is a syndicated real estate columnist.