Mortgage deduction eyed in deficit talks

Ending at least some home-mortgage interest deductions will likely be part of talks to reduce the U.S. budget deficit, The New York Times reported Tuesday. High-income taxpayers would likely be most affected by such a decision, the newspaper said. Meanwhile, President Barack Obama and top congressional leaders stepped up talks in search of a deal to avoid the year-end "fiscal cliff," officials said. The fiscal cliff is a combination of big spending cuts and tax increases scheduled to take effect Jan. 1 unless Congress stops it. Obama telephoned House Speaker John Boehner, R-Ohio, and Senate Majority Leader Harry Reid, D-Nev., over the weekend, officials said, and top Republicans are to meet Wednesday with Erskine Bowles, a Clinton administration chief of staff who was the Democratic co-chairman of Obama's 2010 deficit-reduction panel. After the commission's recommendations failed to garner enough support, Bowles and the panel's Republican co-chairman, former Sen. Alan Simpson of Wyoming, started the group Campaign to Fix the Debt. That group offered a debt-reduction plan last fall in line with Republican principles, GOP aides say. The plan called for $800 billion in new revenue by overhauling the tax code and making significant spending cuts, including big changes to Medicare and other government health programs. "People in both parties agree we need a 'balanced approach' to deal with our deficit and debt and help our economy create jobs," Boehner said in a statement Monday. "We look forward to talking to Mr. Bowles and other members of the coalition [advocating a debt deal] about their ideas to avert the fiscal cliff without tax hikes that target small businesses and cost jobs." Democrats said they were encouraged by Boehner's talk of a "balanced approach" -- a phrase used by Obama to refer to tax increases on wealthy individuals as well as spending cuts -- but they said they wanted details of the GOP position. "We need more specifics. We haven't seen them yet," Senate Finance Committee Chairman Max Baucus, D-Mont., told reporters Monday. Talks on the deficit began Nov. 16 with a meeting between Obama and congressional leaders at the White House. Boehner left the meeting saying "revenue is on the table" as long as it's accompanied by "significant spending cuts." Limiting or eliminating tax deductions is one of the options Republicans and Democrats are considering to generate revenue, aides of both parties say. Diminishing or ending the mortgage-tax break, especially for high-income taxpayers, is likely to be included in that discussion, the Times said of the deduction long seen as untouchable. The National Association of Realtors has strongly opposed eliminating the mortgage-interest deduction for years, saying it "could endanger property values." Association President Gary Thomas told the Times in an email Monday, "It has always been the NAR's position that the mortgage interest deduction is vital to the stability of the American housing market and economy, and we will remain vigilant in opposing any future plan that modifies or excludes the deductibility of mortgage interest." The conservative Tax Foundation says economists are "basically united in their opposition" to the deduction. It says giving a tax subsidy to housing skews investment toward houses and away from factories, equipment and other assets it says are more productive. Households saved $83 billion they would have paid in taxes in 2010 with the mortgage-interest deduction, the libertarian Reason Foundation says. Higher earners realized most of those savings. The tax code could be changed in a variety of ways to increase tax revenue from higher earners, the Times said. The interest deduction relating to second homes could be ended, the newspaper gave as an example. Or the cap on mortgage debt eligible for the interest-rate deduction could be reduced. At present, interest is deductible on only the first $1 million of debt used for acquiring, constructing or substantially improving a home. Before the Tax Reform Act of 1986, the interest on all personal loans -- including credit card debt -- was deductible. The act eliminated that broad deduction but created the narrower home-mortgage interest deduction under the theory it would encourage homeownership. Other countries with high homeownership have phased out the mortgage-interest deduction, the Times said.