Mortgage Interest Deduction Under Scrutiny by Ways and Means Committee

As part of the ongoing effort by House lawmakers to craft comprehensive tax reform legislation in 2013, the House Ways and Means Committee on April 25 heard testimony from real estate experts on the value of the mortgage interest deduction. The panel discussed the possibility of capping the interest deduction at $300,000, but Rep. Jim McDermott, D-Wash., suggested that such a change would have a negative impact on East and West Coast states with higher property values. Moreover, limiting the interest deduction while still maintaining a tax incentive for lower income households would result in added complexity to the tax code, McDermott said.

Committee Chairman Dave Camp, R-Mich., stated that the mortgage interest deduction has played a huge role in boosting home ownership, but he noted that renters are treated differently than owners and that the deduction for interest on home equity indebtedness is disallowed for purposes of the alternative minimum tax (AMT). He noted that the housing provisions in the tax code are governed by different rules and criteria and many require legal or accounting expertise to understand. Ranking member Sander M. Levin, D-Mich., said the tax policies that motivate homeownership should be considered policy, not loopholes, and that any changes to the tax code should reflect income inequalities in society as well as potential revenue impacts.

Select Revenue Measures Subcommittee Chairman Pat Tiberi, R-Ohio, said the impact of the mortgage interest deduction is overstated in relation to home sales. Citing his experience in real estate, Tiberi said few potential homebuyers consider the tax implications of real estate. Most are concerned by the price and location of residential property, according to Tiberi.

Lawmakers appeared sensitive to the potential political backlash from suggesting changes to popular housing-related tax incentives that have broad usage among taxpayers. According to estimates from the Joint Committee on Taxation, the mortgage interest deduction will cost $75 billion in fiscal year 2015, real property tax deductions will cost $30.4 billion and the exclusion of capital gains on owner-occupied housing will cost $26.0 billion.

“Are these provisions desirable candidates for base broadening?” asked Jane G. Gravelle, a senior specialist in economic policy for the Congressional Research Service. “Many economists have criticized the provisions for owner-occupied housing as distorting the allocation of resources, diverting capital from other uses, encouraging the overconsumption of housing, and treating renters differently from owner-occupants,” she said.

Eric J. Toder, co-director of the Urban-Brookings Tax Policy Center, said the mortgage interest deduction is not very effective at promoting homeownership since in provides no subsidy to nonitemizers and a limited subsidy to those in the 15-percent tax bracket. “The subsidy value is largest among upper-middle-income taxpayers, who are the ones most likely to own a home without a subsidy,” Toder noted. “Instead, the main incentive the [deduction] provides is an incentive for those who would own a home without a subsidy to purchase larger or more expensive homes.”

By Stephen K. Cooper, CCH News Staff


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