Is Home Loan Interest Deduction Safe?
With a $4-trillion national debt and an annual federal budget deficit of more than $280 billion, various government insiders, some academics and other public policy participants have been talking about ways to raise more money for not only the federal Treasury, but the state as well.
After the 1986 Tax Reform Act, the primary deduction left on the table for most middle Americans was the first- and second-home mortgage interest deduction and the home-equity loan interest deduction. For the first time, however, these two deductions had limitations placed upon them. First and second mortgages together were limited to no more than $1 million and the home equity loan limit was set at $100,000.
What this action meant at the time was that a precedent had been set regarding congressional tampering with the home mortgage interest deduction. Since 1986, several more ideas have been suggested that would have an even greater impact on middle-income Americans who own their home.
Some recommendations seem simple, others are more complicated.
Example: Both members of Congress and even Ross Perot have suggested that the $1-million limit should be reduced even further, somewhere around $200,000 to $250,000. Along with this they recommend that the second-home mortgage deduction be eliminated altogether.
This is bad for California homeowners because over one-half of all the housing in the United States that is valued at $200,000 or more is located in our state. In fact, some in Congress refer to this suggestion as the “California Tax,” because it would primarily impact California homeowners.
Other more complex suggestions include a 30% capital gains tax on every home sale. This idea has been put forward by the new HUD assistant secretary for policy development, Michael Stegman. Again, however, California would end up generating most of the new federal revenue from this proposal because of our higher home valuations.
Perhaps more controversial is the imputed rent proposal. In this concept the argument is put forth that a homeowner should pay a tax based upon their imputed rental income. In other words, the money you pay in mortgage payments would be viewed “income” instead of “out-go” because you are able to keep the equity in your home. In an inflationary period it could be reasoned that the government would earn those what in business call “a killing.”
Technically, the Treasury refers to imputed rent as “the hypothetical annual benefit of converting home equity into an annuity, minus property taxes.”
According to Henry J. Aaron of the Brookings Institution, this idea would actually generate 40% more federal revenue than elimination of the mortgage interest deduction itself. Another supporter of imputed rent taxation is Alicia Munnell, assistant secretary for economic policy at the U.S. Treasury Department.
We are used to hearing our congressional leaders tell us that the mortgage-interest deduction is a “sacred cow” and nothing can happen to it. Even the Clinton Administration seems to have retreated from earlier trial balloons that signaled a threat to this most sacred of cows. But the central fact remains, our national debt is a staggering sum and our annual budget deficits look like a terminal disease everyone wants to get rid of, but no one knows how.
When you realize that total elimination of the mortgage-interest deduction would create over $50 billion in new revenue annually, (that’s about $1,600 per homeowner each year nationwide), you begin to wonder, “How long will this most sacred of all cows remain sacred?”
Political suicide or not, there may come a time when the numbers begin to look so bad, not even Congress can ignore the fact in the past as well as the present. One fact remains, this issue is not going away. Realtors, builders and bankers have traditionally fought for the deduction in the halls of Congress, but the time is fast approaching when the weight and numbers of homeowners themselves will be the only real protection for mortgage-interest deduction.
