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Morning Word: Scorned Senate Sours on Gov's Real Estate Deal


The tax hikes are designed in part to boost the state's reserve funds, which are at historically low levels and threaten New Mexico's credit rating. The governor has had little appetite for new revenue, instead favoring cuts to a state government she sees ...


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3 reasons why the mortgage tax break isn't a break Subscribe Search Home Subscribe Search Close 40 Under 40 100 Best Companies to Work For Fortune 500 Global 500 50 Most Powerful Women in Business World's 50 Greatest Leaders World's Most Admired Companies All Rankings Automotive Careers Design Energy & Environment Executive Travel Finance Commentary Health International Leadership Luxury Markets Most Powerful Women Retail Sports Technology The Ledger Venture Photography Podcasts Newsletters Magazine Fortune Knowledge Group Fortune Data Store Fortune Conferences TIME Health Digital Health Discovering Luxury Innovation By Design Looking Forward State of the Market MPW Mentorship The 21st Century Corporation Mastering the Market Subscribe Give a Gift Customer Service Stay Connected 3 reasons why the mortgage tax break isn't a break By Nin-Hai Tseng December 3, 2010 The plan to eliminate the mortgage tax deduction was widely criticized, but the industry overreacted to the proposalTurns out it’s not that great for most of us. President Obama’s deficit commission came up short of votes to command quick action in Congress of a bipartisan plan that recommended eliminating or reducing long-standing credits, including the popular home mortgage interest deductionThis isn’t much of a surpriseWhile lawmakers acknowledge that the nation faces an incredibly worrisome debt problem and that a dramatic slash in spending needs to happen, the plan was politically unpopular from the start. Real estate and mortgage industry experts argued the elimination of the mortgage deduction would put more pressure on an already fragile housing marketThat might be the case, but if we look deeper, many of their arguments are exaggeratedIf anything, once the housing market gains some strength three or so years from now, slimming the deduction down some might actually not be such a bad thing and it could save the US government billions of dollarsHere are three reasons why: It doesn’t benefit the vast majority of American homeowners anyway. Under the current program, taxpayers who itemize their deductions can deduct the interest on mortgages of up to $1 million for their primary and second homes, as well as on home equity loans of up to $100,000This overwhelmingly benefits relatively wealthier households since they’re more likely to itemize their tax deductionsMiddle to lower income households tend to go with standard deductions. The deficit commission’s proposal recommended scaling the mortgage interest deduction to $500,000 from $1 million and limiting it to only primary residences and not second homesThe deficit commission also proposed eliminating the mortgage interest deduction and turning it into a 12% nonrefundable tax credit available to everyone – a pitch that some experts including Steve Ott, director the University of North Carolina at Charlotte’s Center for Real Estate says could benefit more homeowners including lower to middle-income households. “A credit is always a benefit but the deduction is only a benefit to the extent that you itemize,” Ott says. What’s more, even though mortgage industry leaders say doing away with the deduction could make homeownership less appealing, Chris Mayer, real estate professor at Columbia University, says the program hasn’t proven to encourage home buyingSince the deduction mostly benefits relatively wealthier households, they would own homes with or without the deduction. Years from now, it’s anyone’s guess what could come next of the mortgage tax deductionEfforts to change the structure have been under way beforeA panel in 2005 appointed by then-President Bush proposed allowing homeowners to claim a mortgage interest credit of 15% on loans of up to $412,000The proposal never really took off. It doesn’t help home prices much. In a way, the timing of the panel’s latest proposals was just badBecause of the fragility of home prices and record foreclosures, the housing market is an incredibly touchy topic, and a very political one at that. Nationally, home prices for the third quarter fell 1.5% from the same time last year and were down 2% from the previous three months, according to data released earlier this week by the S&P/Case-Shiller indexAt least for now, doing away with the deduction or scaling it down would likely push home prices even lower, especially in areas along the East Coast where home prices are higher relative to the rest of the country, says Mayer of Columbia University’s Graduate School of BusinessThis might help make homes relatively more affordable to a wider spectrum of potential buyers but it could also increase foreclosures since far too many homeowners already owe more on their mortgages than their properties are valued. Mayer adds that while winding down the tax deduction would add further pressure to the soft housing market in the short-term, it wouldn’t have much of an impact on prices in the long-runEnacting legislation that would start phasing out the program three or so years from now could be an option. It encourages borrowers to take on more debt. At a time when consumption has trended down and debt-ridden American consumers are trying to save more and spend less, it’s not such a bad idea to tack on policies that could get homeowners to take on a little less debt. One aspect often overlooked in the deduction is that it actually encourages homeowners to take on more debt than they perhaps would have without the subsidy, Mayer saysAnyone who pays off their home debt doesn’t benefit from it. With many homes under water and unemployment still at nearly 10%, many homeowners can barely pay their existing mortgagesSo it’s hard not to wonder why the government should spend so much on a tax policy that could further weaken the American consumer, especially since the subsidy steers them toward spending more of their income on homes as opposed to other goods and services that just might help the broader economy. Also on Fortune.com: Corporate America shrugs off deficit plan Deficit reduction pleas fall on deaf ears Is bipartisan debt-reduction for real? You May Like Read More Sign Up for Our Newsletters Sign up now to receive FORTUNE's best content, special offers, and much more. SUBSCRIBE EDIT POST Subscribe & Save Subscribe today and save 79% off the cover price. SUBSCRIBE NOW Sign Up for Our Newsletters Sign up now to receive FORTUNE's best content, special offers, and much more. 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