The following editorial appeared recently in the Milwaukee Journal Sentinel:
A tax break once considered sacrosanct may no longer be so sacred: the deduction for mortgage interest. As talks move apace in Washington about tax reform and deficit reduction, that particular break is in the cross hairs of both Democrats and even some Republicans. And that's as it should be.
We'd favor scaling back the deduction in the way described in the Simpson-Bowles report — the deficit-reduction commission impaneled in 2010 by President Barack Obama. Limiting the deduction for high-income Americans would cause very little harm — if any — to the U.S. housing market and would exempt middle-class taxpayers.
Here's what Simpson-Bowles suggested:
Make available a 12 percent nonrefundable tax credit available for all taxpayers with homes and cap mortgages considered for the deduction at $500,000; eliminate the credit for second homes.
The housing industry will fight any fiddling with the mortgage interest deduction, but these are modest changes that would ask just a bit more of high-income earners while holding most homeowners harmless.
"This is definitely a chance worth jumping for," Amir Sufi, a professor at the Booth School of Business at the University of Chicago told The New York Times recently. "For a fixed amount of revenue, it's better to remove deductions than increase marginal tax rates."
The same logic could apply to other deductions, including for charitable giving.
Members of both parties have indicated in recent weeks that they favor capping deductions — an idea advanced during the recent presidential election by Republican nominee Mitt Romney. Republicans oppose raising marginal rates, as Obama has advocated. Capping deductions might be a way to raise federal revenue without raising rates — or raising them as much.
The Reason Foundation estimates that households received $83 billion in tax savings in 2010, most of that realized by the affluent. Lawrence Yun, chief economist for the National Association of Realtors, argued in a presentation last year that changes to the mortgage interest deduction could reduce property values by 15 percent.2 comments on this story
It's unlikely that Congress and the president have enough time before lawmakers adjourn for Christmas to craft a "grand bargain" that thoughtfully considers all the pieces necessary for both avoiding the "fiscal cliff" at the end of the year and an overdue reform of the tax code. The Bush-era tax cuts expire Dec. 31 along with the payroll tax cut, and deep automatic spending cuts in federal agencies will take place at the same time without congressional action.
But even if they don't have time now to consider all the details, they should at least make a commitment to study a variety of approaches over the first six months of the new year. And one of them should be limiting deductions for wealthy taxpayers — including for mortgage interest.