Think Tank Recommends Reducing Mortgage Interest Deduction

The Brookings Institution has publishedrntwo articles on tax reform, one of which should be of particular interest tornMND readers.  The two briefs are part ofrnthe progressive think tank’s Remaking Federalism/Renewing the Economyrnseries.  One calls on Congress to makernpermanent and expand the critical research and experimentation (R&E) taxrncredit; the second recommends curtailing “the massive mortgage interest deduction.”</p

The time has come, Brookings says, tornreform the mortgage interest deduction (MID) which “continues to growrnexponentially, subsidizes excessive housing consumption, and divertsrnsubstantial resources from more productive pursuits.” </p

The article’s author Bruce Katz saysrnthat reforming MID “offers an opportunity for the federal government to realizernhundreds of billions of dollars inrnsavings over a 10-year period to contribute toward deficit reduction as well asrnto invest a portion of the savings in policies and programs that are likely tornspur more productive and innovative economic growth.”  </p

Katzrndoes not suggest eliminating the deduction entirely; many economists haverncalled it the single largest deduction available to much of the middle class,rnbut rather reviews several suggestions to rein it in.  The Obama administration has proposed in eachrnof its past four fiscal year budgets a cap of 28 percent on the income tax raternat which taxpayers can use any itemized deductions including the MID. This wouldrnonly affect married taxpayers filing jointly with adjusted gross income (AIG) overrn$250,000 and single taxpayers with an AGI over $200,000.</p

Two versions of a second commonrnproposal to change the MID deduction to either a refundable or non-refundablerntax credit while capping eligible income have been recently suggested by taxrnforces established to look at debt reduction. rnThe so-called Domenici-Rivlin group, proposed shifting the MID to a 15rnpercent refundable tax credit for all taxpayers, lowering the mortgage limitrnfrom $1.1 million to $500,000, and eliminating the provision that allowsrntaxpayers to deduct mortgage interest for second homes and home equity loans.  A second version proposed by Simpson-Bowlesrnwas similar but made the tax credit a non-refundable 12 percent.</p

A third proposal made recently (referencedrnby presidential candidate Mitt Romney and now advocated by several Republicanrnmembers of the House) has been to put an overall cap on itemized deductions</bincluding the MID and the deduction for charitable contributions.  Various versions would put the cap betweenrn$25,000 and $50,000.</p