In recent months, American taxpayers have witnessed quite a few realities with regard to the national budget. First there was the fiscal cliff, which averted the expiration of the mortgage interest tax deduction, and then there is the issue of the seemingly inevitable sequester and ensuing spending cuts. These cuts are bringing up the mortgage interest tax deduction back into the fray.
According to a recent CNBC news article, the United States Treasury estimates approximately $100 billion of annual revenue is not collected due to the generous mortgage interest tax deduction, which extends to second homes. This means that an high-income mortgage borrower who owns a primary residence in Wisconsin and a vacation home in Florida can deduct up to $1 million in on interest paid on the primary mortgages of both properties, and up to $100,000 of home equity loans. Since the sequester is believed to cut less from the budget than the potential revenue that could be realized should this deduction come to an end, intensive lobbying is shaping up around this issue.
Among the various proposals being considered, an outright elimination of this deduction does not enjoy too much support. The White House is interested in setting income limits so that only middle and working-class taxpayers will have the right to claim this deduction, although these two groups have been underrepresented in tax returns filed since the collapse of the housing market. Not surprisingly, the housing industry is opposed to any changes.
CNBC interviewed representatives from the National Association of Home Builders (NAHB) and the National Association of Realtors (NAR), two powerful housing industry groups that are vehemently opposed to changes and are fighting to keep the status quo. According to transparency Web site Open Secrets, the housing industry paid $80 million in lobbying fees and expenses to keep the mortgage interest tax deduction safe from the fiscal cliff. The NAR believes that drastic changes to this tax break will result in the erosion of 15 percent of home equity across the nation, thereby undoing recent housing market gains realized during the ongoing recovery.
Kansas Governor Sam Brownback is one of the few supporters of a complete elimination, but the majority of his constituents do not agree. Kansas residents would like to see greater spending cuts. A couple of Democratic Representatives support a tax credit for low-income home buyers similar to the one spurred by the First Time Home Buyer program back in 2008. The rationale behind this credit is that most of the taxpayers who actually take this deduction are high-income earners in the first place, and thus home ownership is not evenly distributed among American socioeconomic classes.
House Speaker and GOP leadership figure John Bonner (R-Ohio) supports limiting the scope of the mortgage interest tax deductions to limit the number of high-net worth taxpayers who currently claim it, but he does not support new taxes to alleviate the growing budget deficit.