The mortgage interest deduction that has been embraced by generations of American homeowners may be significantly changed in negotiations to avoid the so-called fiscal cliff, but the multibillion-dollar question is, will the deduction be slashed or capped in a way that reaches deep into pockets of the middle class?
While Congress last week remained gridlocked over how to produce an alternative solution to a cascade of massive tax hikes and federal spending cuts that are set to take place in January, both sides agreed that some kind of tax increase must be part of the solution, and both parties agree that $4 trillion in deficit reduction is needed in the next decade.
For many Republicans, eliminating or capping deductions, including home mortgage interest, is gaining popularity as a way to raise revenue, particularly if it is crafted to hit mostly higher income earners.
"I don't know what the number would be," said Rep. Steven LaTourette, R-Ohio, when asked how low the cap on the mortgage interest deduction might be set. "But I'll tell you, the purpose of the home interest mortgage deduction is to give Americans the dream of homeownership. The guy that has the $5 million house, he's probably living the dream and doesn't need the mortgage interest deduction."
Negotiations on a fiscal cliff deal are taking place mostly behind the scenes between House Republicans and the White House, and few specifics were floating around Capitol Hill last week.
Republican leaders are insisting in raising revenue only by eliminating some tax credits and deductions, while President Obama, who campaigned on raising taxes on the so-called rich, wants rates to go up for those making more than $250,000.
Rep. Charlie Dent, R-Pa., told The Washington Examiner that "lots of ideas" are on the table for lowering deductions, including one that would set an overall cap at $50,000 for all types of deductions.
"It's one idea people are looking at, and it would limit the amount of deductions an individual can take, which could conceivably limit the mortgage deduction," Dent said.
According to the IRS, the average itemized deduction for interest for those making $250,000 or more in 2008, the most recent year tabulated, was $27,865. Add the average charitable deduction for that income group ($20,930), plus medical expenses ($37,143) and other deductible taxes ($50,267), and the number easily exceeds the cap.
But for those making less than $200,000, the combined deductions in 2008 fell to $38,000 and below, well below the cap.
Rep. Mike Simpson, R-Idaho, said the GOP likes the simplicity of an overall cap, rather than targeting certain deductions.
"The easiest way to do it is to limit the total amount of deductions you can take," he said. Simpson said setting the cap will have to be decided in committee during the next congressional session, which starts in January.
"That's the reason you won't get it done by the end of the year," Simpson said, though he added, "People have talked $50,000," for the cap.
Democrats, however, are already balking at the number. In a report issued last week by the White House, a $25,000 cap on itemized deductions, which was supported by Republican presidential nominee Mitt Romney, would not produce enough revenue if it is applied only to those earning more than $250,000.
Simpson acknowledged that the cap can't be the only way to bring in new revenue.
"You may see a portion of the deal include elimination of exemptions, but ultimately, I have to think the marginal rates on the wealthiest will go up because I don't see how Obama gets out of that campaign promise."
