Friday, November 12, 2010

Slaughtering a Sacred Cow

If the country wants to really get serious about reducing the national debt, a few sacred cows will need to be slaughtered. One of those cows is the mortgage interest deduction for homeowners. This week the co-chairs of the bipartisan deficit reduction commission suggested that the time has come to do just that.

The mortgage banking and real estate interests are already mobilizing their forces to see that this doesn’t happen. They are claiming that this will put the final nail in the coffin of an already beleaguered housing industry.

Maybe, maybe not.

When you get beyond the sound bites that always to seem to frame our national debates, you learn that the proposal isn’t to eliminate the deduction entirely. According to this story by Carla Fried on, the idea is to “end the mortgage interest deduction on primary-home mortgages above $500,000, down from the current limit of $1 million. The deficit-cutting duo also proposed to completely eliminate the deductibility on second homes and home equity loans and lines; currently up to $100,000 of interest on such loans and lines qualify for the tax break.”

This would net the government a savings of approximately $131 billion as early as 2012.

“That’s the White House’s official estimate of the 2012 revenue cost of the mortgage interest deduction.  A study that looked at proposals to reform the mortgage deduction put out by the Tax Policy Center at the Urban Institute points out that sum is “much more than the total of all outlays by the Department of Housing and Urban Development ($48 billion).”

I realize that this may sound like heresy from someone who is in the real estate business but if we are going to be serious about reducing the deficit, we have to be willing to offer part of our own government subsidized largess. As David Stockman so eloquently put it, it is delusional to think that we “don’t have to tax ourselves to pay our bills.”

That being said, the proposed elimination of this mortgage interest deduction and other tax deductions will have a corresponding cut in tax rates. According to this story by Tamara Keith on NPR’s Morning Edition, the commission is further “proposing a restructuring of the whole tax system, eliminating all kinds of tax breaks while reducing tax rates overall.”

Will it kill the housing industry?

There is no question that the impact would be felt hardest by those who develop higher end housing, but considering that the average sales price of a home in HoCo this year is $355,000., the majority of homeowners would not be affected. 
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