Mortgage Interest Deduction Escapes the Ax

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NEW YORK (MainStreet) — The mortgage interest tax deduction that’s now on the chopping block from a proposal by President Obama’s deficit commission survived a key vote last Friday. The deduction is alive and well, for now. But who comes out ahead from the vote, and can the deduction survive more scrutiny from the government?

For that matter, can the deduction survive the scrutiny of the American public? While a recent CBS poll reports that 73% of Americans say the deficit problem is “very serious”, few homeowners want to give up the lucrative mortgage interest tax deduction.

The poll reports that 75 million U.S. citizens qualify for the deduction, and those who take the deduction average $2,078 in tax savings.

For now, the deduction is safe thanks to an 11-7 vote from the President’s Deficit Commission rejecting the panels’ proposal to cut $4 trillion from the U.S. deficit. The proposal required at least 14 votes to proceed to debate in Congress. Five Republicans, five Democrats, and one Independent voted for the proposal.

In its recommendation to cut $4 trillion from the nation’s debt burden, the deficit panel wanted to limit the mortgage deduction to principal homes only (vacation homes and rental properties wouldn’t qualify), and that eligible mortgages would be capped at $500,000, down from the current cap of $1 million. The panel would have gradually phased the deduction out gradually, over a period of 10 to 20 years.

Critics grabbed their Louisville Sluggers and lined up to take a swing at the deficit panel’s recommendation. The National Association of Realtors estimates that home values would plummet by 15% if the deduction were eliminated.

“[Eliminating the deduction] would negatively impact home ownership for millions of Americans, including those who own their homes outright and have no mortgage,” said the NAR in a Dec. 1, 2010 statement. “Any further downward pressure on home prices will hamper the economic recovery, raise foreclosures and hurt banks’ abilities to lend, and likely tip the economy into another recession resulting in further job losses for the country. It will effectively close the door on the American dream.”

But others say the mortgage tax deduction is unfairly weighted in favor of the wealthy. The National Low Income Housing Coalition, testifying before the commission, claimed there were “extreme inequities” between homeowners and renters when it comes to the deduction. The group also claimed the deduction cost the federal government $86 billion in 2009, and an estimated $135 billion by 2013.

While the initial vote went against groups like the NLIHC, the commission is expected to head back to the negotiating table, and another vote is expected. But with so many powerful interests up in support of the home mortgage tax deduction, and the will of 75 million Americans behind it, too, don’t expect the deduction to go the way of the Edsel.

In surviving the first vote, the tax deduction has sent its own message to politicians: “Mess with me, and you’re messing with your political futures.”

It’s a message that pols have clearly received.

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