Romney's Mortgage-Tax Plan Is a Drop in the Bucket

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By Deborah Solomon

Mitt Romney, the presumptive Republican presidential nominee, was overheard this weekend saying he'd tinker with the ever-popular mortgage-interest tax deduction to help achieve his goal of cutting individual tax rates across the board by 20 percent.

Perhaps befitting someone who owns multiple residences, Romney said he'd consider doing away with the tax break only for second homes.

This got me wondering: Just how much revenue is the government giving away each year by allowing wealthier Americans to deduct the mortgage interest paid on their second (or third) home? After all, the mortgage-interest deduction is the second-largest tax expenditure and is estimated to cost the U.S. government $131 billion in 2012.

I asked the very smart economists at the Tax Policy Center, a joint venture of the Urban Institute and Brookings Institution, for their calculation. Based on some very rough, initial estimates, they say Romney's idea would save the U.S. about $10 billion per year.

However, they said the ultimate savings could be far less. That's because Romney's broader tax plan would translate into a 20 percent cut in any revenue gain from eliminating the deduction. That drops the savings down to about $8 billion. Second, Romney said he'd limit the deduction for "high-income" individuals, but hasn't given an income level cutoff. Obviously, most people who own a second home would, by definition, be "high income" but depending on how he structures it, the revenue impact could vary.

Still, it makes sense to phase out the deduction for anything but a single home. After all, the benefit is already an "upside-down" tax subsidy that  provides a bigger benefit to people with higher incomes since it's tied to income brackets. The Center for American Progress calculates that households with incomes between $40,000 and $75,000 receive an average $523 from the mortgage-interest deduction, while households with incomes above $250,000 receive $5,459.

President Barack Obama has also targeted the tax break for wealthier taxpayers in the 33 percent and 35 percent tax brackets, proposing to cap the deduction at the 28 percent tax rate. His proposal would cover all mortgages, not just mortgage interest paid on second homes.

One thing is for sure: This is a deduction that many people love and it seems like it's gearing up to be a big issue in the 2012 campaign. That should provide  a lot of fireworks, if not actual policy changes.

(Deborah Solomon is a member of the Bloomberg View editorial board. Follow her on Twitter.)

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-0- Apr/16/2012 20:10 GMT