Mortgage deductions could use a ceiling

IN THESE DARK DAYS for the Bush administration, I’ve been looking for some light, something on which to lavish unequivocal praise. And here it is. The president’s advisory commission on tax reform on Monday recommended a limit on the home mortgage interest deduction.

But isn’t the home mortgage interest deduction almost a fundamental right? Doesn’t it help most Americans pay for their homes? Isn’t it, in other words, sacred?

No, no and no. As it is designed right now, it mostly benefits the rich, is grossly unfair and costs the Treasury a bundle.

Here’s how it currently works. Homeowners can deduct from their income taxes all interest paid on mortgages written for up to $1.1 million. This means people living in mansions with gigantic mortgages get to deduct tens of thousand of dollars a year. It’s as if the federal government handed them a giant housing subsidy. But most people who rent their homes don’t get a dime from the government to subsidize their cost of housing -- and they generally have far lower incomes than homeowners.

Nor does the mortgage interest deduction help most homeowners with modest incomes -- those in the $20,000 to $50,000 range. That’s because, at tax time, they take the standard deduction. According to the IRS, two-thirds of taxpayers don’t bother itemizing their deductions. Even if you do itemize your deductions, the home mortgage interest deduction benefits the rich far more than anyone else. If you’re in the 33% bracket, for example, a $10,000 mortgage interest deduction cuts your tax bill by more than $3,300. But if you’re in the 15% bracket, a $10,000 deduction cuts your taxes by only $1,500.

This is doubly unfair when you consider that housing assistance for poor Americans has been slashed recently. In its determination to cut spending and reduce the federal deficit, Congress is likely to cut low-income housing even more. Even as the economy booms, the nation’s homelessness rate continues to rise.

You couldn’t design a more regressive housing policy if you tried. The home mortgage interest deduction cost the Treasury $63 billion in lost revenue last year, and the rich got most of it. Yet the entire budget of the Department of Housing and Urban Development -- which, among other things, provides low-income housing -- was just $35 billion.

Enter the president’s tax reform commission.

It wisely wants to lower the million-dollar ceiling on the mortgage interest deduction to the size of an average mortgage in any region of the country. In today’s market, the ceiling would range from about $170,000 in many rural areas to a high of $412,000 in high-priced housing areas such as Southern California. This is just good common sense, and fair.

The commission also wants to turn the deduction into a tax credit. (Specifically, the credit would be 15% of eligible mortgage interest.) Remember that tax credits are subtracted directly from the income taxes otherwise due. So anyone with a $100,000 mortgage, for example, would be able to subtract the same amount from their taxes, regardless of their incomes. Also sensible and fair.

Together, these proposals would extend the tax benefit for homeownership to most middle-class and lower-income Americans. The only people who would lose the benefit are wealthy Americans who don’t need it to begin with.

So the Treasury saves billions of dollars, average Americans get more help with their housing and the government’s hidden housing subsidy to the rich is finally ended.

The only problem is that these sensible ideas are probably dead on arrival. Realtors, mortgage lenders and home builders are already screaming bloody murder. To them, any limit on the mortgage interest deduction marks the end of civilization as we know it. The only way this proposal gets enacted is for the White House to spend lots of its dwindling political capital on it. Don’t hold your breath.

Still, good ideas for tax reform often take years to take hold. They slowly worm their way into Washington’s collective brain until they seem almost obvious. With any luck, this one is on its way.

So let’s give praise where praise is due. The administration deserves at least two cheers for floating a very good idea.