Even before the Fiscal Commission voted on whether to approve its controversial deficit reduction plan, the mortgage and housing industries were gearing up in opposition to its proposed elimination of the mortgage interest deduction.
The heads of the Mortgage Bankers Association (MBA), National Association of Realtors (NAR) and National Association of Home Builders (NAHB) all slammed the proposal earlier this week, saying it would have a devastating effect on both home ownership and the economy.
The commission voted 11-7 today to support the proposal, although that fell short of the 14-vote margin needed to mandate congressional action on its recommendations.
"A rollback of the mortgage interest deduction as proposed by the commission would have a devastating impact on both present and future homeowners in this country," said Michael Berman, MBA chair. "It would immediately stop in its tracks any stabilization we are seeing in the housing market and would effectively increase the cost of homeownership for millions upon millions of people."
Warnings of a new recession
NAHB Chair Bob Jones commended the commission for its efforts to address the nation's fiscal problems, but said eliminating the mortgage deduction was simply the wrong approach to the problem.
Eliminating the deduction would "put a huge tax increase on millions of middle-class homeowners," Jones said, adding that it would "further depress home prices, putting countless more home owners underwater and triggering a new wave of foreclosures."
"Given the extreme fragility of the housing market, with 21 percent of construction workers currently idled, tampering with the mortgage interest deduction is just not sound public policy," he added.
NAR President Ron Phipps said his organization's research indicated that eliminating the mortgage interest deduction could depress home prices by as much as 15 percent, putting the country at risk of a renewed recession.
"The tax deductibility of interest paid on mortgages is a powerful incentive for home ownership and has been one of the simplest provisions in the federal tax code for more than 80 years," Phipps said, calling the deduction "vital to the stability of the American housing market and economy."
Deduction could be reduced, not eliminated
The Fiscal Commission's proposal suggests eliminated all "tax expenditures" - that is, deductions and credits - as a way of simplifying the tax code and addressing the budget deficit. Overall tax rates would be cut, but most middle-class earners would pay more taxes as a result of losing deductions and credits for such things as mortgage interest, dependent children, retirement savings, employer provided health care and the like.
To be sure, the complete elimination of tax deductions and credits is only one option the commission is expected to propose. The report also offers options for retaining certain tax benefits, such as the mortgage interest deduction and child tax credit, in exchange for lesser reductions in overall tax rates.
It also suggests that some deductions could be modified or reduced instead of eliminated - for example, disallowing the mortgage interest deduction on second homes, home equity loans and any portion of a mortgage that exceeds $500,000.
Vote expected to give clout to proposals
When President Obama established the Fiscal Commission back in February, his executive order stipulated that its report would need the support of 14 of its 18 members to send it directly to Congress for consideration. That didn't happen, but today's 11-7 vote is expected to give clout to the proposal and generate momentum for the recommendations heading into the new Congress.
Support and opposition to the report on the bipartisan panel was mixed, with Democratic and Republican members coming down on both sides of the vote, although for different reasons.
The report was initially released by the commission's co-chairs, Erskine Bowles, chief of staff under President Clinton and former Sen. Alan Simpson, a Wyoming Republican, three weeks ago. Since then, they have been trying to rally support among the commission members.
The bipartisan commission is equally divided between Democrats and Republicans, with 12 current members of Congress, four members drawn from outside of government and the two co-chairs.