A tax break that has long been untouchable could soon be in for some serious scrutiny.
Many home buyers deduct their mortgage interest when assessing their tax bill, a perk that has helped bolster the income of millions of families — and the broader housing market.
But as President Obama and Congress try to hash out a deal to reduce the budget deficit, the mortgage interest deduction will likely be part of the discussion.
Limits on a broad array of deductions could emerge in any budget deal. It is likely that any caps would be structured to aim at high-income households, and would diminish or end the mortgage tax break for many of those taxpayers.
Frankly, if there are to be tax increases, I prefer this kind over general rate increases. For one thing, I can think of no reason to tax renters and those who have paid in full for their homes at a higher rate than those with mortgages. Secondly, the existence of this deduction is one of the causes – although a minor cause – of the housing bubble. Finally, I am generally opposed to using tax policy to drive specific behavior. It is just another way in which the federal government attempts to control the activities of the citizenry. Tax collection should be for revenue generation and nothing more.
The end of this deduction would further depress housing prices but historically low mortgage rates today would minimize that effect. I see no real net benefit to artificially high housing prices anyway.
The right thing to do would be to eliminate this deduction in exchange for a commensurate decrease in income tax rates. That, of course, isn’t going to happen. I am hoping these sort of increases can be traded for the stabilization of current rates rather than the end to deductions AND a rate increase.