Trimming Mortgage Deduction for the Wealthy Comes Under Fire

Scissors_Zechariah_Judy_CCFlickr The Obama administration has proposed trimming a deduction for wealthy taxpayers, which it says will save $321 billion over 10 years and help close the federal budget deficit.

It’s called the mortgage interest deduction, and it allows homeowners to deduct the interest they pay on their mortgages from their taxes. The deduction costs the government $131 billion a year.

Special interest groups including the National Association of Home Builders are gearing up for a campaign to fight the change, saying it would hurt middle class and endanger the housing market’s already fragile recovery.

[Article: Solving The Foreclosure Mess—Let’s Get Serious]

“We will oppose any limit,” Jerry Howard, chief executive of the National Association of Home Builders, told CNN. “This is an attack on the middle class.”

But whether the subsidy actually helps the middle class is the subject of a long debate. Economists James Poterba and Todd Sinai found that families earning more than $250,000 a year reap deductions 10 times greater than middle class families. A study by the Brookings Institution found that most of the deduction subsidizes the purchase of larger homes by people who would have bought anyway.

Get matched with a personal loan that’s right for you today.

Learn more

The bipartisan National Commission on Financial Responsibility and Reform, created last year to suggest ways to trim the budget deficit, suggested replacing most of the deduction with a 12% tax credit paid to all taxpayers.

“Because most of the subsidy goes to individuals who would likely own homes without the tax benefit, it has little effect on homeownership,” the Brookings Institution found. Ending the mortgage interest deduction “would benefit low- and middle-income groups,” according to the study.

[Featured Product: Research and Compare Secured Credit Card Offers on Credit.com]

The Obama administration’s proposal is far more modest. Taxpayers who earn $250,000 and up would be limited in how much they could deduct, and mortgage debt above $500,000 would no longer be eligible for an interest deduction (the current upper limit is $1 million of mortgage debt).

Nevertheless, the industries that benefit most from the mortgage deduction are gearing up to fight the proposed change. The National Association of Home Builders has created a new website to tell consumers its side of the issue. And it has partnered with the National Association of Realtors to win Congressional support House Resolution 25, which would affirm the importance of the deduction.

Image: Zechariah Judy

Editor’s note: On March 14, 2011 at 6:33 p.m., this story was updated to correct an error. Mortgage interest deduction is based on mortgage debt on the home, not on the value of the home, as originally reported.