Sacred cow no more? Budget proposal curtails mortgage interest deduction

Just days after winning a major legislative victory in the stimulus package, the housing industry lobby machine is cranking up again — this time to oppose an element of President Obama’s proposed 2010 budget, which would curtail the mortgage interest deductibility for tax filers in high brackets.

The proposal would let tax filers in the 33 and 35 percent brackets deduct their mortgage interest only at the 28 percent level, cutting off some tax savings these high-income filers currently enjoy. (For an explanation and an example, see this Wall Street Journal article.)

This is an odd wrinkle. The mortgage interest deduction is now available on mortgages of $1 million or less. If the White House wanted to generate more revenue, why not lower the cap?

One potential explanation is that property values vary greatly by region: A $1 million home is positively rich in rural areas, but much less so in cities like New York and San Francisco. By lowering the cap, the feds risk exempting someone in a mansion in Plainfield but ensnaring someone in a starter home in Marin County. While incomes vary by region, the variation is probably less than for property prices.

The National Association of Home Builders and the National Association of Realtors have both voiced full-throated opposition to this aspect of the 2010 proposed budget. Mortgage interest deductibility has long been considered a sacred cow in politics and these lobbies’ influence will be tested, but I expect this to be changed before a final 2010 budget is passed. (And if you’re curious about the arguments against the mortgage interest deduction, check out this New York Times Magazine article from 2006.)

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