Mortgage Deduction

The President's tax panel has intimated lowering the mortgage deduction, a tax break enjoyed by about 70% of the country. It's politically very unlikely that this "every removal of a tax cut is a tax INCREASE!" society will accept an across-the-board cut, and I don't think they should. Encouraging home ownership is good for the country, which is why the government seeks to subsidize it in the first place. But there are some kinks you can work out that would make good horse sense.

Currently people can take the mortgage deduction on second homes, speculative property, or any other mortgage that is not their primary residence. That not only doesn't seem like it encourages home ownership, it makes the possibility of home ownership more difficult to families who are thrown into an escalating market with higher demand. Speculative real-estate buying raises prices, pure and simple. There's no need to regulate the housing market, but at the same time the government shouldn't be giving back cash to speculators so prices can skyrocket.

In addition, interest accrued on home-equity loans can be deducted. How exactly does buying a car or a big-screen TV encourage home ownership? In recent years, when home-equity loans have become so fashionable, it doesn't seem in the interests of the country to offer a huge deduction for that.

So there are smart ways to raise government revenue, maintain the goal of encouraging home ownership, and in fact make it easier for prospective buyers to achieve that goal (presumably any change to the mortgage deduction will depress prices). But slashing the deduction across the board would be ludicrous, and unfortunately that's where this appears to be headed:

Taxpayers can currently deduct all the interest on mortgage loans up to $1 million.

But President Bush's tax-advisory commission is considering a new limit on the deduction: the maximum mortgage the Federal Housing Administration will insure -- $305,900 in Seattle. That amount varies around the country, with a maximum of $312,895 in areas with very high housing costs, such as San Francisco, and a national average of $244,000.

If the proposal is accepted, a Seattle couple that buys a $500,000 home and borrows 80 percent, or $400,000, could deduct interest on only $305,900 of that amount.

I live in Southern California (and I'm desirous of entering the housing market), where under this plan practically EVERY single home would feel the burden of this rise in their taxes. This would particularly hurt residents in any fast-growing housing market, especially New York, Los Angeles, San Francisco, Seattle, and others. I don't have to tell you the political leanings of those areas.

I don't think it's wise to throw up a wall to any changes in the mortgage deduction. But any across-the-board proposal is simply ridiculous.