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Mortgage interest tax deduction: safe until after 2012 election?

Supercommittee's likely course coming into focus

Inman News™

Congress' supercommittee -- the bipartisan, 12-member panel assigned the task of cutting $1.5 trillion from the federal deficit in the next 10 weeks -- met for the first time last Thursday, appointed top staff, and took preliminary peeks at alternative combinations of spending reductions and revenue increases that could get them to their goal by Thanksgiving.

Severe cutbacks or elimination of longtime tax preferences as the mortgage interest deduction and local real estate write-offs were on some of the menus that floated into the staff.

For example, the influential, bipartisan private-sector Committee for a Responsible Federal Budget urged members to "go big" and "go long" -- well beyond $1.5 trillion -- and offered several options on the mortgage interest deduction, including elimination of second-home interest write-offs outright, capping the primary home mortgage interest deduction at $500,000, and turning it into a credit.

Over a 10-year period, the group estimated that by limiting mortgage interest deductions and other itemized write-offs for high earners -- presumably those with household incomes above $250,000 or individual incomes above $200,000 -- it could knock $250 billion off the deficit.

Curtailing all state and local tax deductions, including for property levies, would save $470 billion, according to the group.

But other, much broader themes emerged during the committee's first week that could ultimately determine the fate of the mortgage interest deduction.

No. 1: Despite dire predictions that the committee is unlikely to produce a consensus package by its Nov. 23 deadline, the view among committee members and staff increasingly is the opposite -- they are going to get it done.

There are enough spending-reduction items available on the menus being circulated that they can agree on -- and convince their partisan colleagues in the House and Senate to support, albeit holding their noses -- that the committee is now likely to deliver some sort of package.

No. 2: Despite calls from President Obama to shoot for a $4 trillion big splash by late November, the politically more astute approach will be to aim small to avoid rejection by one or both houses of Congress, which must approve final legislation by Dec. 23.

That strategy, say Capitol Hill tax specialists close to the committee, will involve mainly spending program cuts and only modest changes to tax preferences -- no changes to the primary home MID, but possibly a phase-out or restrictions on the mortgage interest deduction for second homes.

Under this scenario, said to be favored by key members on both sides, the committee would hold back on big-ticket tax changes until after the 2012 election, and then have Congress come back in 2013 to produce comprehensive tax-reform legislation -- lowering tax brackets across the board but reducing long-standing preferences such as the mortgage interest deduction, along with a slew of others.

Capitol Hill sources tell me that since Republicans -- and some Democrats -- in the House and Senate are not likely to approve major revenue increases item by item, there is no political logic for committee co-chairs Sen. Patty Murray, D-Wash., and Rep. Jeb Hensarling, R-Tex., to force it on them.

That would risk triggering the deep defense and Social Security provider cuts in 2013 mandated by the legislation authorizing the supercommittee in the event members cannot agree on a plan or get it past both houses of Congress.

Moreover, the sort of across-the-board reductions in tax expenditures required for a comprehensive tax-reform plan this year could not even be "scored" by the Congressional Joint Committee on Taxation between now and the deficit committee's deadline.

("Scoring" means tax technicians' best estimates of the impacts on federal revenues -- plus or minus -- of specific tax-code changes. If a broad tax package proposal cannot be scored, the House and Senate cannot evaluate it properly for a vote.)

That fact alone argues against any "global" tax reform effort by the committee, sources told me, and a postponement of all or most major moves on taxes until after the 2012 election.

So the preliminary good news for the real estate industry is that there appears to be little appetite on the supercommittee to limit, phase out or eliminate the mortgage interest tax deduction in the upcoming package.

The potentially more sobering news is that comprehensive tax reforms -- reducing marginal rates for individuals and corporations, capping the mortgage interest deduction or turning it into a far less valuable tax credit and phasing out property tax write-offs -- are very much on the agenda for 2013, no matter who wins the election.

Deficit reduction is now seen by majorities on both sides of Capitol Hill as crucial public policy. Comprehensive reforms affecting housing write-offs, Social Security, Medicare, Medicaid and employer health care exclusions will soon be front and center, just not this year.

Ken Harney writes an award-winning, nationally syndicated column, "The Nation's Housing," and is the author of two books on real estate and mortgage finance.

 


Ismar Maslic, GRI / Broker

14585 Big Basin Way, Saratoga, CA 95070

CalBRE License Number: 01313976, 01918597

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