NAR, Others Weigh-In on Mortgage Interest Deduction Debate as Fiscal Cliff Looms Near

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Although it was the Republicans who first suggested that the US deficit could be tackled by eliminating tax deductions, rather than raising tax rates, choosing which deductions to cut and by how much, will be no easy task, starting with the granddaddy of them all, the mortgage interest deduction.
 
The 100-year-old deduction, beloved by homeowners and the real estate industry alike, might be on the chopping block in a myriad of ways. Of course the whole thing could be eliminated, which most people don't expect. But there are other ways to wring revenue out of curtailing the deduction, without eliminating it altogether.
 
Walter Molony, spokesman for the National Association of Realtors (NAR) says that, while it is hard to respond to questions about the mortgage interest deduction until there is a concrete proposal on the table, "an earlier projection done by NAR's chief economist, Lawrence Yun, showed that there would be a loss of 15% of total home equity in US," should the deduction be eliminated completely. "But that is unlikely," he says.
 
"We did an analysis that showed that the economic activity of two home sales is equivalent to the creation of one job, because people who buy homes also need appliances, carpeting and other items," for the new house, says Molony. All that activity makes up one fifth of US GDP, he says.
 
These jobs cannot be lost, says Molony, but that would happen if the mortgage interest deduction was eliminated, in which case the NAR estimates that there could be a decline in home sales of 10% to 15%, which would lead to the loss of between 250,000 and 350,000 jobs over time, he says.
 
There are many ways to alter the mortgage interest deduction, rather than eliminate it. While the NAR and other real estate trade groups oppose any modification of this deduction, others have suggested that it could be capped, or at least changed in a way that would be less costly for middle class home owners, while still contributing to the US Treasury. For example, the deduction for second homes could be eliminated or there could be a cap on the size of the mortgage eligible for the deduction. Currently, that limit is $1 million per couple.
 
It has been widely reported that high earners are the ones who benefit the most from the mortgage interest deduction today, because they itemize their tax returns. But Molony says that only 9% of the people claiming the deduction earn over $200,000 per year and 65% of them earn less than $100,000. "The fact that only a certain percentage of the middle class takes the mortgage interest deduction is irrelevant to the discussion about the deduction," he says. "There are lots of middle class people who are renters." 
 
Bob Pozen, senior fellow at the Brookings Institution, has a different take on the mortgage interest deduction.  "No one is seriously proposing to eliminate it," he says, "But we want to reduce its scope and promote home ownership. For one thing, we give a mortgage interest deduction for second homes, which doesn't promote (new) home ownership. Also, there is a deduction for a home equity line of credit, which doesn't go toward purchasing a home," says Pozen.  Plus, the deduction to buy a bigger home does not encourage more people to buy homes, he says.
 
Pozen suggests that there could be a $500,000 limit for mortgages eligible for the mortgage interest deduction, rather than the current $1 million.  Another possibility would be to replace the itemized deduction with a tax credit that would be available to people making between $50,000 and $100,000, many of whom do not itemize, he says. (Pozen says that most itemizers do make over $100,000.) If, on the other hand, the goal of keeping the mortgage interest deduction in its current form is to promote job creation, there are other ways the government can do this, says Pozen.