July 28, 2013

Maine Voices: Mortgage deduction ready for reform

Changes in the tax code will benefit more taxpayers and increase the availability of housing for all Maine residents.

By JEAN-MARIE CATERINA

SCARBOROUGH - Approximately two weeks ago, I was approached by some folks who wanted to talk to me about ideas for making changes to the tax code that would modify the mortgage interest deduction.

click image to enlarge

While favorable tax treatment for homeowners should continue, converting to a tax credit system would present many advantages over the current mortgage interest tax deduction system.

2013 File Photo/The Associated Press

As a real estate broker, my immediate reaction was to throw up my hands and protest that such talk was akin to touching the third rail on electrified train tracks.

Who would buy houses? What incentive would there be for middle-class folks to invest in real estate? Why would one take away the only write-off that most middle-class Americans have? Who is preaching this heresy?

CORRECTING SYSTEM'S INEQUITIES

I immediately began researching efforts to reform the mortgage interest deduction. I called a fellow real estate agent who also happens to be a certified public accountant and sent him information from the United for Homes Campaign for his opinion. I sat down with Greg Payne, development officer at Avesta Housing, an organization that provides affordable housing to Maine people.

What I learned opened my eyes to an alternative that is nowhere to be found in the material I receive from my trade association.

Congress has been making overtures recently regarding reforming the tax code, calling it the "blank slate." In this approach, Congress would eliminate all tax breaks and start from zero in an attempt to simplify and correct the inequities of the current system, restoring only those provisions proven to be worth the cost.

Already, the special interests are lining up to argue that their portion of the tax code should remain untouched and is far too important to the average taxpayer to change. The trade association to which I belong, the National Association of Realtors, is no exception.

While I agree that favorable tax treatment for homeowners is desirable and should be preserved, I argue that there is a different route to be pursued that benefits more taxpayers, is less regressive and can increase the supply of affordable housing available to those who cannot afford to buy.

TAX CREDIT BETTER THAN TAX DEDUCTION

In a recent National Low Income Housing Coalition survey, more than 60 percent of Americans indicated support for tax benefits related to the purchase of real estate. However, as a real estate broker with more than 350 transactions over 11 years, I have never once had a residential buyer or seller mention the mortgage interest deduction.

I was surprised to learn that only 51 percent of current homeowners claim this deduction, according to the Tax Policy Center -- the other 49 percent do not have enough income to itemize deductions on their returns.

To reduce the regressive nature of the mortgage interest deduction, let's allow all homeowners to take a credit on the interest they paid for their first $500,000 of mortgage debt. This means that they can subtract 15 percent of the mortgage interest they paid, right off the top of what they owe.

A secondary benefit of switching from an interest deduction to a tax credit is an increase in funding available to the federal government to fully fund the National Housing Trust Fund, a program that was instituted during the Bush administration to provide funding for affordable housing initiatives and end homelessness in America. This program has never been funded.

REDUCING THE FEDERAL COST

For those deficit hawks out there, the current mortgage interest deduction costs all of us $80 billion a year. By converting to a tax credit system, we simultaneously extend a tax benefit to more middle-class home-owners and reduce the federal cost by $200 billion over 10 years. This is a win-win for all.

Other details of the tax credit proposal -- in particular, reducing the mortgage cap from $1 million to $500,000 -- will have a minimal impact in Maine. Data shows that only 0.8 percent of new mortgages in Maine between 2007 and 2011 were above $500,000.

My own high-end buyers, more often than not, pay cash for housing, including second homes. If a mortgage is used, it is below the $500,000 threshold. This reduction in the cap will be phased in over five years and will continue to include mortgage interest paid on second homes.

And homeowners will still be able to deduct the interest on the first $100,000 of home equity loans.

Please join me in supporting the efforts of the United for Homes Campaign in advocating changes to the tax code that increase the availability of housing for all, and please ask our members of Congress to do the same.

As a real estate professional whose goal is to assist as many people as possible in finding a home they can afford, and a Maine citizen who thinks it is not right that there are people living in our streets, I want tax and housing policy that works for everyone.

Jean-Marie Caterina of Scarborough is owner of the Caterina Maclean Group and two other businesses.

 

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