Harney: Mortgage interest, property taxes in play in tax bill

Homeowners, especially in the high tax corridors of the Northeast, Washington D.C., Maryland, Virginia, parts of the Midwest and California, are among SALT’s heaviest users. Most of these areas have higher than average home prices and household incomes. They tend to vote Democratic but have some Republican representation in the House and Senate.

Those blue-state Republicans, in fact, have been a key force behind the re-thinking on SALT. They know their constituents would be disproportionately impacted by a total elimination of the SALT deduction, and they’ve lobbied House and Senate tax-writing committee leaders for relief. Among the possibilities:

• Allowing homeowners to write off property taxes, but not income or sales taxes.

• Giving homeowners the choice of either writing off state and local taxes or mortgage interest, but not both.

• Setting a household income ceiling for eligibility to take the SALT deduction.

It’s not clear which, if any, of these might show up in a final legislative package, but the SALT issue is definitely in play. Any of these changes would lower revenues. Limiting SALT deductions to property taxes but not income or sales taxes, for instance, would cost the government an estimated $300 billion over 10 years. But compromising on SALT would solidify political support for the tax plan among blue state Republicans, whose votes could be essential to passage.

Another noteworthy area where there’s been some re-thinking: the mortgage interest deduction. Under the framework proposal, this popular benefit would be left untouched in the tax code. But doubling the standard deduction would mean that far fewer homeowners would choose to itemize and claim it. As a result, say critics, the deduction will be watered down as a financial spur to home buying. The 1.2 million member National Association of Realtors has been outspoken in demanding that tax writers preserve the effectiveness of the deduction. But in recent weeks, other major housing groups, such as the National Association of Home Builders and the Mortgage Bankers Association, have expressed willingness to explore alternatives — and that has helped spark interest in creating a new form of subsidy: a mortgage tax credit, perhaps in conjunction with a substantial reduction in the current $1 million ceiling on deductions for mortgage interest.

Under the credit concept, borrowers might be able to subtract some percentage — say 10 or 15 percent — of interest payments off their federal tax bottom line, no matter what their income tax bracket. (Deductions, unlike credits, vary based on tax brackets; the higher your bracket, the bigger your deduction.)

J.P. Delmore, a top lobbyist for the home builders association, told me his group is seeing “serious interest” in the credit idea. “There is a recognition that a properly crafted credit would provide a broad, meaningful tax incentive to millions of middle-class homeowners who do not itemize currently.” In a speech last week, House Ways and Means Committee chairman Rep. Kevin Brady, R-Texas, confirmed that he is open to re-examining the mortgage interest deduction, including ways to open it up to “all phases of homeownership.” A credit, which would be available to non-itemizers, would fit that description, say supporters of the idea.

Where’s this all headed? Republican leaders hope to pass their tax overhaul bill before the end of the year. That’s optimistic. But keep this in mind: Whatever happens to the bill, there’s a surprising willingness afoot to re-evaluate decades-old approaches to encouraging homeownership with tax benefits while simplifying the tax code.