Democrats Back Cap on Mortgage Deductions : Plan by House Ways and Means Committee Members Would Limit Tax Break to $1 Million

House Ways and Means Committee Democrats, piecing together a tax package that is expected to win approval from the full panel Thursday, voted Tuesday to cap the amount of debt eligible for home mortgage deductions at $1 million.

If the provision should become law, it would be the first such limit on what has been one of the most cherished and politically untouchable of individual tax breaks.

Republicans, lining up behind President Reagan in his opposition to tax increases, have refused to participate in writing the tax bill. Additional revenues are needed to meet this year’s $23-billion deficit-reduction target mandated by the Gramm-Rudman budget-balancing law.

Left on their own, committee Democrats met in closed session and put together a package of more than $12 billion in new taxes, many of which appear to be directed at the GOP’s traditional constituency of wealthy individuals and businesses. They steered clear, however, of excise taxes and adjustments in tax rates that would hit hardest at lower- and middle-income individuals.

“The Republican members of the committee have followed the President’s lead and walked away from the deficit-reduction process,” committee Chairman Dan Rostenkowski (D-Ill.) said.

“It is their hope that we will fail. . . . That would allow them to continue their anti-tax rhetoric and yet blame the Democrats in the Congress” for the automatic spending cuts that would occur under Gramm-Rudman, if Congress fails to meet the deficit-reduction goal.

‘Fun and Games’

But with the full committee having a solid majority of Democrats, the tax package appears headed for the House floor after what Rostenkowski predicted would be a day of “fun and games” when the panel meets Thursday.

Home mortgages emerged from the 1986 tax-revision law relatively unscathed. The sweeping tax-overhaul legislation allows unlimited deductions on mortgage interest paid for both first and second homes.

The committee Democrats originally considered a stricter deductible home-mortgage limit of $500,000, but settled instead for $1 million.

Another proposal that they endorsed is a $100,000 limit on the amount of home equity loans from which interest payments may be deducted. Both provisions would apply only to indebtedness incurred after the committee vote now scheduled for Thursday.

A series of provisions included in the package would chip away at the tax breaks that have helped corporate raiders finance their acquisitions. Among them is a proposal to allow a maximum of $5 million in interest deductions on debt that directly or indirectly supports a takeover.

The Democrats also voted to impose a 50% excise tax on so-called “greenmail” gains--the inflated prices that companies often pay to buy back their own stock from a would-be corporate raider.

Meanwhile, Democrats on the Senate Finance Committee struggled to come up with their own tax package, but agreed on only $7.6 billion of deficit-reducing tax increases, which include extending the 3% tax on telephone service that is now set to expire at the end of the year.