WASHINGTON -- The cost of extending the use of tax-exempt mortgage revenue bonds beyond their scheduled Dec. 31 expiration could be covered by capping the tax deduction for interest paid on home mortgages, a congressional study says.

The report, written by Congressional Research Service analyst Dennis Zimmerman, said the trade-off would help Congress in targeting low-income citizens for federal housing subsidies.

The suggestion was sparked by the new buget guidelines under which Congress is operating this year. They stipulate that any proposal that would lose federal revenues -- such as extending the authority to issue tax-exempt mortgage bonds -- must be offset by a revenue-raising them.

The report, released earlier this month, suggests balancing extension of the tax break for mortgage revenue bonds by capping the income tax deduction allowed for the interest charged on a taxpayer's home mortgage -- a deduction that is open to taxpayers regardless of their income.

Mr. Zimmerman's analysis holds that budget constraints will keep the total amount of federal housing subsidies from growing in the near future. If Congress does not want that amount to decrease through the termination of tax-exempt mortgage revenue bonds, denying a portion of the mortgage interest deduction to upper-income taxpayers may better distribute those subsidies, he said.

"If the federal government's subsidy of the housing industry is to be reduced by the [amount] currently spent on MRBs, more social benefits sought from increased homeownership would result if the [funds] were taken from mortgage interest, deductions rather than MRBs," Mr. Zimmerman said in his report.

"Arguably these effects are desirable, or at least tolerable, for the purpose of the policy is ... to increase homeownership and, coincidentally, reduce the overconsumption of housing services attributable to the mortgage interest portion of the federal subsidy for owner-occupied housing," the report says.

While the ceiling would have to be low enough to generate enough savings to continue the mortgage bond exemption, it also must be high enough that the deduction is not denied to the people the federal government is trying to help through the mortgage bond subsidy, the report says.

Mr. Zimmerman suggested denying 25% of a taxpayer's mortgage interest deduction if that individual's annual adjusted gross income is more than $200,000. For taxpayers with adjusted gross incomes between $100,000 and $200,000, he suggested a disallowance of 8.5%.

Mr. Zimmerman estimated that would save the federal government $1.6 billion, the amount he said would be needed for a permanent extension for the mortgage bond exemption.

But the actual amount needed may be much smaller, because the Joint Tax Committee has estimated that extending the mortgage bond exemption permanently would cost the federal government $770 million. Mr. Zimmerman's analysis takes into account the entire amount of outstanding mortgage bonds, while the committee's estimate is based on the amount of new issues that would not come to market if mortgage bonds were allowed to die.

Housing lobbyists and a congressional aide said Mr. Zimmerman's report seems to describe a simple and logical way to pay for an extension of the mortgage bond extension. But his suggestion ignores the political reality that the mortgage interest deduction is extremely popular and unlikely to be cut back in any way, they said.

When asked whether Congress would consider capping the mortgage interest deduction this year, the congressional aide said flatly, "it isn't going to happen." The aide cited lobbying by interests representing home builders and real estate agents.

"Among the strong lobbies in this town is the one represented by the National Association of Home Builders, National Association of Realtors, and Mortgage BAnkers Association of America," said a housing lobbyist who asked not to be identified. "They would not stand idly by" if the mortgage interest deduction were threatened in any way, he added.

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