By Town Crier Report
A proposal by President Bush’s Advisory Panel on Tax Reform to abolish the Mortgage Interest Deduction for homeowners in favor of tax credits drew sharp criticism from local realtors when it was introduced Nov. 1.
Adopting the recommendations could have dramatic consequences for local housing markets, warned Willi Krauss, president of the Silicon Valley Association of Realtors (SILVAR). Her local trade organization represents more than 4,000 real estate professionals in Los Altos and Silicon Valley and on the mid-Peninsula.
“Housing is the engine that drives our economy, and the very mention of changing a century-long commitment to homeownership incentives is startling,” Krauss said. “The tax deductibility of interest paid on mortgages is both a powerful incentive for homeownership and one of the simplest provisions in the tax code. Why would anyone want to change it?”
The mortgage interest deduction has been part of U.S. tax policy since the federal tax code was first enacted in 1913. The panel’s proposal is supposed to help offset an estimated $1.2 trillion in losses over 10 years stemming from its recommendation to eliminate the alternative minimum tax for individuals.
But Susan Tilling of Los Altos Hills, a realtor for 33 years, said the Feds “shouldn’t solve (budget problems) on the backs of the homeowners.”
Tilling said all local legislators are opposed to the mortgage interest deduction elimination. “They recognize it’s going to affect all of our housing values. This is going to have a wide-ranging effect,” she said.
The panel recommended the replacement of the home mortgage interest deduction with a 15 percent credit for mortgage interest paid annually. For homeowners who currently deduct mortgage interest, the transition from the deduction to the credit would be phased in over a five-year period. The credit would be capped at adjusted Federal Housing Administration loan limits, estimated at $411,704.
“For over 100 years, realtors have worked to keep the American dream of homeownership affordable for those upon whose hard work our economy is based,” said Janet Case, CEO of SILVAR. “We need more incentives for housing, not fewer, especially here in our area. Our San Mateo County and Silicon Valley realtor associations, along with the state and national realtor associations, will fight strenuously on behalf of all homebuyers and homeowners against this effort to abolish the mortgage interest deduction.”
While realtors have reacted negatively to removing the deduction (the Reagan administration also attempted its removal in the 1980s), some economic observers think the move is a good idea.
“The mortgage-interest deduction is bad economic policy,” said Froma Harrop with the Providence Journal. “It encourages consumption, rather than saving. People take out big mortgages to free up spending money. (They convince themselves not to worry about all the borrowing because the interest on the loan can be tax-deductible.) An unhealthy economic incentive, the deduction is also expensive. It cost the U.S. Treasury $63 billion last year in needed revenues. The entire budget of the U.S. Department of Housing and Urban Development was $35 billion.
“The deduction is bad social policy. It discriminates against renters, and even homeowners of moderate means,” she said.
The Contra Costa Times countered: “Ending mortgage interest deductions on mortgages above $300,000 or $350,000 would place an unfair burden on families living in areas with high home prices. It also would devastate the real estate market in many regions of the nation, particularly in California. The fact is that families living in homes with mortgages of $500,000, $600,000 and more are common. These are not wealthy people.”
