A Minnesota lawmaker wants to revamp the mortgage interest deduction so that more homeowners would receive the tax break and then use the anticipated savings to invest in low- and moderate-income housing.
As it stands, borrowers can deduct the interest on the first $1.1 million of a home loan, but under a bill Rep. Keith Ellison, a Democrat, introduced Friday that cap would be lowered to $500,000. His proposal would completely convert the mortgage deduction to a 15% tax credit for all homeowners with a mortgage. The deduction would be phased in over five years and potentially would raise $196 billion.
The mortgage interest deduction, according to some analysts, costs the U.S. Treasury roughly $50 billion a year in revenue. The Congressional Budget Office has proposed phasing out the mortgage interest deduction entirely over five years, a change it says would add $215 billion to the Treasury's coffers through 2021.
Many analysts have argued that the mortgage interest deduction is an "upside-down" subsidy that benefits the rich. While 75.5 million homeowners currently pay mortgage interest, only 39 million, or 51%, get the tax break. The other 49% do not have enough income to itemize deductions on their tax returns, according to the nonprofit National Low Income Housing Coalition.
On a conference call Monday, Ellison said the savings from his proposal would not be used to reduce the deficit but rather would fund the National Housing Trust Fund, Section 8 rental assistance and low-income housing tax credits.
"We spend a lot of money on housing but we don't spend it where it's needed the most, which is on low-income people," Ellison said. "More than three times as much is spent on homeownership."
The National Low Income Housing Coalition plans to spend $1 million to rally as many as 1,000 organizations nationwide to gain support for the legislation, says Sheila Crowley, the coalition's president and chief executive. The number of homeowners who would get a tax break under the proposed bill would increase to 55 million and 99% of the new beneficiaries would have incomes of $100,000 or less.
"The mortgage interest deduction does not go to every homeowner," says Crowley. "This is a good time to take this on because tax reform is on the table and the mortgage interest deduction is low-hanging fruit."
Though some Republicans have expressed interest in doing away with the tax benefit entirely or at the very least eliminating it for second homes, it's hard to imagining them supporting Ellison's bill because it would do nothing to lower the deficit. Moreover, any proposal that limits the ability of consumers to write off interest payments on their homes would face intense lobbying from the mortgage industry, homebuilders and the National Association of Realtors.
Isaac Boltansky, an analyst with Compass Point Research, says that while the mortgage interest deduction may no longer be a sacred cow, an overhaul of the deduction is unlikely to become a centerpiece of tax reform.
"It's remarkably difficult to envision a scenario where there are significant changes to the mortgage interest deduction," Boltansky says.