April 26 (Bloomberg) -- U.S. lawmakers are weighing how far they can go in altering one of the most politically sensitive provisions in the tax code: the deduction for home mortgage interest.
While pledging a “careful, thoughtful review,” House Ways and Means Chairman Dave Camp asked witnesses at a hearing yesterday for ideas on how to transition to a new, still-unspecified system. That’s a signal he’s considering changes that could be disruptive to real estate markets and looking for ways to soften those effects.
Camp’s scrutiny of the mortgage interest deduction is part of his plan to rewrite the U.S. tax code, curtailing breaks and lowering tax rates in a way that doesn’t increase the federal government’s total collections. He wants his committee to approve a bill this year.
Changing the mortgage interest deduction could affect real estate agents and home builders, along with the appliance and furniture industries.
In 2012, 34 million households, or 22 percent of tax filers, claimed the home mortgage deduction. That cost the federal government $68 billion in forgone revenue, according to estimates from the congressional Joint Committee on Taxation.
The deduction is available only to the one-third of taxpayers who itemize their deductions and tend to have higher incomes. More than three-quarters of the benefit in 2012 went to households with annual incomes exceeding $100,000.
Still, the tax benefit is less skewed toward the nation’s highest earners than some other breaks, such as lower rates on long-term capital gains.
At the hearing, Camp hosted several critics of the deduction, including Eric Toder of the nonpartisan Tax Policy Center and Phillip Swagel, who was a Treasury Department official for President George W. Bush. Toder said the deduction doesn’t increase homeownership rates and instead encourages buyers to borrow more or buy bigger homes.
“The key is really to focus the tax benefits more carefully,” said Swagel, now a public policy professor at the University of Maryland.
Economists and bipartisan groups have suggested ideas for curbing the mortgage interest deduction without eliminating it. Those include lowering the $1 million cap on the amount of a loan that can be deducted and preventing owners from claiming the break for second homes.
Representative Sander Levin, the top Democrat on the committee, said he would be wary of eliminating the tax break for second homes. Many residents of his district in central and northern Michigan have “small second homes” elsewhere in the state, he said.
“It’s something we need to be careful about in our proposals,” Levin said.
President Barack Obama has proposed limiting the deduction and other individual tax breaks to the value they would have in the 28 percent bracket. Under that plan, someone in the top tax bracket with $10,000 in mortgage interest would receive a tax break of $2,800, not the $3,960 they get today.
The government also could convert the deduction to a credit, which would equalize treatment across income groups.
Any of the proposals could be phased in to minimize the immediate effect on real estate markets or tax bills.
Representative Linda Sanchez, a California Democrat, said she wants to ensure changes wouldn’t make it more difficult for working-class families to afford a home.
“I’m a little bit skeptical of changes to the tax code that would have the effect of putting that goal out of reach,” she said.
Real estate industry representatives who testified at the hearing warned about the potential economic costs of changing the deduction.
Gary Thomas, president of the National Association of Realtors, opposed altering the deduction, in part because of who benefits from the current system.
“It is young middle-class families with children who already carry more than their fair share of the tax burden,” he said, citing numbers for who takes advantage of the deduction, not the size of the benefit.
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