December 1, 2012

Our View: Caution: Mortgage interest deduction at risk

It may or may not be wise to adjust it, but even the idea makes millions of people queasy.

Not every taxpayer who files a Form 1040 itemizes deductions, but for most of those who do, the deduction allowed for mortgage interest ranks right at the top of the list.

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A single-family home under construction in Portland, Ore., boasts a sold sign in July. Lawrence Yun, chief economist at the National Association of Realtors, said that now would be the worst possible time to change the mortgage interest deduction because it would further depress demand in the struggling housing sector.

The Associated Press

So it is understandable that a vast national queasiness arises whenever anyone raises a trial balloon about reducing or (gasp) even eliminating it.

While nothing should be off the table when the nation faces recurring annual deficits of more than $1 trillion, due caution is called for in this case.

The deduction is often a large part of most people's Schedule A, or even the largest one. But it's even bigger in the total amount of money it lets homeowners shield from taxation.

It allows more than $80 billion a year to stay in people's wallets instead of being shipped off to the U.S. Treasury, and that pile of money is more than enough to attract the attention of lawmakers wanting to either cut the deficit or have more cash on hand to continue or expand current programs.

Now, with members of Congress in both parties conferring with President Obama to avoid the "fiscal cliff" presented by the expiration of the Bush tax cuts on Jan. 1 (along with a more recent payroll tax cut and the resurgence of the alternative minimum tax), rumors are flying that the mortgage interest deduction could be back on the table for federal budgeteers.

As things stand now, people can deduct the interest charged on loans with face amounts of up to $1 million on first and second homes, and on equity loans up to $100,000.

The real estate sales industry -- along with bankers and other investors and housing contractors and their suppliers -- naturally regards the deduction as sacrosanct, saying that the health of their wide-ranging enterprises, which in total employ millions of workers, is already suffering from the recent recession and a weak (but somewhat strengthening) recovery.

Limiting or removing the deduction, they say, will be a blow to that recovery, putting substantial downward pressure on employment and profits.

But supporters of limiting the deduction say that it benefits higher-income taxpayers the most, because its effect grows as incomes (and thus mortgage amounts) increase. Most people who use it would buy houses even if it didn't exist, they say.

Either way, however, it would seem wise to make changes slowly if they do have to be made. The economy has had enough shocks lately without adding the fiscal equivalent of an 8.5-scale earthquake into the equation.


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