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I wonder how many people buying homes planned on having the whole deduction when buying. Just as important.. How many banks are underwriting with the future heavier tax burdens of the borrowers in mind? FHA and GSE's certainly aren't factoring it in. From the LA Times:Tops on the CBO's hit list for housing: Slash deductions for homeowner mortgage interest from the present $1.1-million limit to $500,000, phased in with $100,000 annual reductions starting in 2013.
Taxpayers now can write off mortgage interest on their principal home debt up to $1 million and on home equity debt up to $100,000. Under the CBO's option, that maximum mortgage debt amount would shrink yearly until it hit $500,000. Over a 10-year period, this change would boost tax collections by an estimated $41 billion.
The CBO offered up a second option if Congress wants to raise a lot more money: Replace the mortgage interest deduction with a flat 15% tax credit for everybody with mortgage amounts below the declining limits in the first option. Rather than taking write-offs tied to income tax bracket, every homeowner would get a credit worth 15% of mortgage interest paid.
This would be effective wage deflation for many. The NAR will definitely gunning full bore for mortgage interest deductions to be left alone. I am thinking this might be more of a political move to try and pass the "compromise" of maxing out the deduction at 28% as has been suggested in a few different places. For high cost areas like California the deduction is a much bigger part of "affordability" than lower cost, lower wage areas of the country.
The LA Times is reporting that the opposition to the mortgage interest deduction is lining up. The National Association of Home Builders, National Association of REALTORS® and the Mortgage Bankers Association all have come out in the opposition. The bill hits California and New York the most. One sixth of the people targeted by the plan live in California. I don't think the plan would have an immediate impact on prices but over the long term it would affect the first and second move up tier of the market which as those prices fell would then affect the lower end of the market. That would take some time.The immediate issue for buyers today, no matter their tax bracket, would be that the deduction is no longer sacred they can't plan long term that it will be as high as it is today and would have to factor that into their near term purchasing decisions. The law is written as a cap on all deductions so I think the property tax deduction would also be affected. As it is I think people overestimate the deduction affect of mortgage interest on their ability to buy as they calculate the deduction for the first year when the interest paid is highest but don't take into account amortization and the fact that interest paid reduces over the life of the loan. From the article:Fear that the Obama proposal could lead to future cuts to the deduction is a major concern of some opponents, said David Kissinger, director of government affairs for the South Bay Assn. of Realtors.
"If today it's households earning $250,000 who will pay more, does it mean tomorrow if they still need to balance the budget it will be those making $180,000, then $160,000? How often is the government going to go back to the well?" he said.
While I think the arguments by the NAR against the plan are overdone, the slippery slope argument does have some merit to it.
From the WSJ:The tax increases would raise an estimated $318 billion over 10 years by reducing the value of such longstanding deductions as mortgage interest and charitable contributions for people in the highest tax brackets. Households paying income taxes at the 33% and 35% rates can currently claim deductions at those rates. Under the Obama proposal, they could deduct only 28% of the value of those payments.
The changes would be phased in gradually over the next few years. For the 2009 tax year, the 33% tax bracket starts with couples with taxable earnings of $208,850, when adjusted for personal exemptions and various deductible expenses. A taxpayer in the top bracket paying $1,000 of mortgage interest, for example, would see a tax break worth $350 reduced to $280.
