The President’s Advisory Panel on Tax Reform has issued its final report and, as expected, is recommending a major overhaul to tax provisions related to home ownership and home equity. The root of the panel’s recommendations is the sense that current homeownership tax benefits are too generous, encourage overinvestment and overborrowing, and disproportionately benefit higher income taxpayers:
The tax preferences that favor housing exceed what is necessary to encourage home ownership or help more Americans buy their first home. For example, the $1 million mortgage limit may encourage taxpayers to purchase luxury residences and vacation homes. In addition, the deduction for home equity loan interest may encourage taxpayers to use their houses as a source of tax-preferred financing for consumer spending.
The benefits of current tax incentives for housing are not shared equally among all taxpayers. Under current law, the tax benefits for housing, which are larger than the entire budget of the Department of Housing and Urban Development, mostly go to the minority of taxpayers who itemize deductions. These taxpayers typically are drawn from higher-income groups. Over 70 percent of tax filers did not receive any benefit from the home mortgage interest deduction in 2002. According to the Joint Committee on Taxation, more than 55 percent of the estimated tax expenditure for home mortgage interest deductions went to the 12 percent of taxpayers who had cash income of $100,000 or more in 2004. Figure 5.6 demonstrates how households with higher income receive a disproportionate benefit from the home morgage interest deduction. Specific recommendations are for replacing the general mortgage interest tax deduction with a less-generous "home credit" and for complete elimination of the tax deduction for home equity (including HELOC) loans. The Panel recommends that the deduction for mortgage interest be replaced with a Home Credit available to all homeowners. The Home Credit would be equal to 15 percent of mortgage interest paid by a taxpayer on a loan secured by the taxpayer’s principal residence and used to acquire, construct, or substantially improve that residence. The Panel recommends that the deduction for interest on mortgages on second homes and interest on home-equity loans be eliminated. Obviously, there will be widespread debate of these proposals (and other tax reforms included in the report) over the next several months. Hopefully, the outcome will be a simplified, rational tax system founded on the nation’s long-term interests rather than the special interests of powerful groups.
November 6th, 2005 at 10:33 am
Tax change long overdue!! It’s a tax plan and an energy plan at once. There are a bunch of retired folks out there owning two and even three homes or more across the country that they migrate to throughout the seasons, many completing trips in gas hog RVs. There is more than sufficient home inventory across the country but prices are over the top and out of reach of regular wage earners - all created by the current tax code, speculators, easy lending and folks who migrate with the season like herds of buffalo.
We’re for a change - eliminate the mortgage deduction at least for second homes!!
November 8th, 2005 at 9:31 am
The idea that lower income tax payers won’t be hurt by this is wrong. Obviously, “Mom & Pop” businesses, which have lmuch ower incomes but are able to itemize and benefit from the mortgage interest dedection, will suffer dramatically.
November 12th, 2005 at 2:24 pm
If one thinks that Social Security is the “third rail” one would only need to vote to eliminate home interest deductions to find him/herself unable to be electable. The idea that this is too much of a benefit flies in the face of reality. Literally millions of middle class home owners would be severely damaged by this obscene idea. Want your party out of power for decades? Vote to eliminate the interest deductions for homeowners.
November 16th, 2005 at 7:22 pm
Mr David Brumbaugh, the tax code limits mortgage interest deductions for a taxpayer/couple to 2 primary residences. It requires that in order to take the deduction for 2, that the taxpayer couple demonstrate that they actually utilized 2 residences as primary. Most state & local tax codes impose additional taxes (increased rate) for ownership of a 3rd or more.
Beyond that, the elimination of home mortgage interest deduction is not only obscene, but I strongly believe if implemented that its end result would be revolt.