More Pressure on Mortgage Interest Deduction?

Strapped Governments
Look for "Honey Pots"

"Because that's where the money is."

--bank robber Willie Sutton, explaining why he targeted banks

For the same reason Willie Sutton robbed banks, financially strapped governments (federal and state) inevitably are going to revisit the home mortgage interest deduction as they seek to close record deficits. (Also getting scrutiny: deductions for state property taxes.)

According to some estimates, doing away with the mortgage interest deduction completely could raise as much as $100 billion in additional revenue annually (read, taxes).

As policymakers try to restrain themselves, though, they should ask: what will that do to housing prices?

Given that the cumulative value of all U.S. housing is something like $16.5 trillion, according to Freddie Mac, even a 1% drop would destroy $165 billion in value, swamping the "benefit" of increased tax revenues.

Even that arguably understates the damage, due to a phenomenon called the "wealth effect" -- basically, economic-speak for people consuming more (or less) as their wealth fluctuates.

So, the ultimate economic hit would likely be a multiple of the $165 billion drop in home prices.

In view of the foregoing, what's far more likely is some combination of a cap on deductions, means testing, and the like.

P.S.: our legal system has a principle, called stare decisis, that requires judges to defer to -- rather than disturb -- established precedent. Literally tens of millions of Americans going back decades have bought homes with the expectation that the mortgage interest deduction would be respected.

If that isn't long-established precedent -- I don't know what is!

Tax Trial Balloons

Gov't. Financial Squeeze = Homeowner Squeeze?

The mortgage-interest deduction has been a political no-go zone for decades. The same for local property-tax write-offs. But with billowing deficits and the need to raise trillions to help pay for health-care reform and the economic stimulus bills, somewhere, somehow, Congress is going to be pressed to raise revenue.

--Kenneth Harney, "Going Where Congress Hasn't Gone"; The Washington Post (8/29/09)

Kenneth Harney's column today makes the (valid) point that just because Congress is in recess, doesn't mean that policy shifts aren't afoot.

In fact, Congressional staff are right now busily proposing all sorts of revenue-raising ideas to close gaping budget deficits as far as the eye can see.

"That's Where the Money is"

At the top of the list: various proposals to limit the size of mortgages that qualify for interest deductions; eliminating the itemized deduction for state property taxes; and raising capital gains taxes.

To "lessen" the impact of the foregoing, Congress would employ incremental phase-in's (for higher taxes) and phase-out's (for deductions).

Locally, the City of Minneapolis is floating the idea of annual, 10%-15% property tax increases practically off into the sunset.

Why are homeowners such fat targets?

To paraphrase what Willie Sutton said when asked why he robbed banks: 'because that's where the deductions are.'