Recently, a blue ribbon advisory panel presented the President with a set of recommendations regarding revising the income tax in the United States. While probably well researched and documented, (I don't think anyone would argue that our income tax system is perfect) one of the reports major recommendations has caught the attention of almost everyone, including me. That is the proposal to eliminate the income tax deduction for mortgage interest on owner occupied homes.
While I am sure that some economists would be able to explain to us all why the mortgage interest deduction is not appropriate in creating a tax structure, what the committee fails to consider here is that they are not "creating" a new tax structure, they are "modifying" an existing one. The one on which millions of families have based their most important and significant financial decision-making.
The fundamental truth is that the mortgage interest deduction has helped create a country with among the highest home-ownership rates in the world and changing the rules of the game at this point has the potential to create massive dislocation for individual families and our economy.
The leverage that the deduction provides enables more families to buy their own home - to achieve part of the American dream. Just as rising interest rates can slow home sales, the elimination of the deduction would reduce the activity in one of the most important segments of the economy. The ripple effects through the economy could be staggering, affecting lenders, builders, supplies, and even the local governments who depend on new development and increasing home prices to fund ever increasing tax revenues.
I guess this is a bad idea whose time has, hopefully, not yet come. Luckily for those of us paying taxes it doesn't appear that the idea has much traction here in D.C. and many of the strongest industry trade associations including the National Association of Realtors and National Association of Home Builders have taken strong positions against it.
