Home write-offs: endangered species?
WASHINGTON — If you take mortgage-interest tax deductions, the next 100 days could have significant financial implications for you, thanks to Congress' federal debt-ceiling plan.
Though the compromise legislation involved no new taxes, it created an unusual mechanism — an evenly split, 12-member bipartisan super-committee — that could call for major cutbacks in real-estate write-offs by Thanksgiving.
All it will take is a single vote by a lone senator or House member who breaks with his or her party to put the mortgage-interest deduction into serious play.
Here is what's about to unfold and how it could affect you:
The legislation signed by the president Aug. 2 calls for a two-step increase in the federal debt ceiling plus spending cuts of about $917 billion. It also created the Joint Select Committee on Deficit Reduction with the goal of slashing an additional $1.5 trillion from the deficit over the coming decade.
The panel is required to vote on a plan to achieve these objectives by Nov. 23, using revenue increases, spending cuts or a combination. If the committee members cannot agree on a plan or if either house of Congress votes it down, automatic and severe spending cuts of $1.5 trillion will be imposed equally on the Department of Defense and domestic programs including Medicare-provider payments.
The structure of the committee is akin to a jury room rigged with high-power explosives if the jury fails to reach a verdict. Membership consists of six Republicans and six Democrats, three each from the Senate and House, chosen by party leaders.
To approve a final package of deficit cuts and extend the debt ceiling, all that will be needed is a simple majority — seven votes.
Though Democrats favor revenue increases to close the deficit and Republicans want to slash spending without raising taxes, there is a real possibility that one or more panel members could be so concerned about the prospect of painful automatic defense or social-program spending cuts that they would go with their conscience and break party ranks.
That compromise might well involve new revenues, and one of the lowest-hanging potential sources is the mortgage-interest deduction.
Lobbying groups that seek to preserve housing write-offs already are gearing up for battle. The National Association of Realtors sent an urgent alert to its 1.1 million members asking them to directly "engage their members of Congress on the importance of preserving real-estate tax provisions" during the coming several weeks.
Officials acknowledge that the super-committee's structure — with its guaranteed punishments for failure aimed squarely at Republicans (military spending) and Democrats (social programs) — makes it more difficult than usual to influence the final outcome.
After decades of being considered politically sacrosanct, why are homeowner mortgage write-offs suddenly on the chopping block? No. 1 is sheer size.
The congressional Joint Committee on Taxation estimates the deduction will cost the federal government $100 billion during fiscal 2011 and $107.3 billion in 2012.
Between 2008 and 2012, the cumulative write-offs for mortgage interest are projected to total just under half a trillion dollars.
Among the options open to the super-committee: Lower the maximum mortgage amount eligible for interest deductions to $500,000 from the current $1.1 million; replace the deduction with a tax credit that would be usable by lower- and moderate-income owners, as well as those with higher incomes; eliminate interest deductions on second homes; and phase out the deductibility of homeowner property-tax payments.
Defenders of the write-offs argue that high levels of homeownership are essential to economic growth and social stability, and fully justify the tax-system preferences they receive.
National opinion polls regularly find widespread support for the write-offs, even among renters.
Also, academic and trade group studies project that any abrupt, across-the-board reduction in the deductibility of mortgage interest would have a severe impact on home values, possibly sending them plummeting by as much as 15 percent.
Critics, on the other hand, consider the write-offs inherently unfair: that they're skewed to upper-income owners disproportionately, and are highly concentrated geographically along the West Coast, the Northeastern states and mid-Atlantic.
Where's this debate ultimately headed? It's much too early to predict.
But any way you look at it, real-estate write-offs could be in greater political jeopardy in the next three months than they have been at any time in the past 25 years.
Ken Harney's email address is email@example.com.
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