Policy

Battle Lines Form Over Popular Mortgage Interest Deduction

Homebuilders, lenders concerned by parts of Trump’s tax plan

House Ways and Means Chairman Kevin Brady of Texas, seen holding a “Make America Great Again” hat after a GOP conference meeting in November, says there is no need to cap popular deductions to offset the cost of tax rate cuts. (Bill Clark/CQ Roll Call file photo)

Homebuilders and lenders are preparing to defend the mortgage interest deduction as the incoming Trump administration and Congress weigh potential adjustments to one of the most popular tax sweeteners.

Treasury Secretary-designee Steven Mnuchin last week raised eyebrows on Capitol Hill and drew scrutiny from business advocates by pointing to potential curbs on the mortgage interest deduction in a CNBC interview.

“We’ll cap the mortgage interest, but allow some deductibility,” Mnuchin said on Nov. 30.

President-elect Donald Trump’s tax proposal makes no specific changes in the current federal tax write-off for home mortgage interest on loan principal amounts of $1 million or less. But the plan calls for a cap on all itemized deductions, which would include the mortgage interest deduction, at $100,000 for an individual tax filer and $200,000 for a couple filing jointly.

David Stevens, president of the 2,400-member Mortgage Bankers Association, said in an interview that his group has serious concerns about any potential changes, including any attempt to lower the loan principal cap.

“In isolation, it would be something we would object to strongly,” Stevens said. “If there is going to be broad income tax reform, we are eager to engage in that dialogue, and we assume everything is on the table.”

Jerry Howard, CEO of the National Association of Home Builders, pushed back against any new mortgage incentive curbs and Trump’s itemized deduction cap.

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He said such measures “would be a sign the government is not encouraging home ownership” and a reversal of longstanding policy goals.

“There needs to be an open, candid debate about whether the government should be in the business of encouraging certain kinds of social behavior,” Howard said.

For now, senior tax writers say they are taking a cautious approach to dealing with the mortgage interest deduction, while waiting for more details of Trump’s plans for tax legislation.

House Ways and Means Chairman Kevin Brady said he is sticking by a cornerstone of the House GOP tax plan by retaining three popular tax breaks for mortgage interest, charitable giving and higher education. Asked whether he envisioned curbing or capping any of those three items to raise revenue to offset the cost of tax rate cuts, the Texas Republican said, “We don’t need to.”

If there are any tweaks, Brady said, he would be “looking at how you can make it smarter and work better for more people.”

Senate Finance Chairman Orrin G. Hatch of Utah told Roll Call that he doubted the new administration would find much consensus for tightening limits on mortgage interest write-offs.

“He knows he’s not going to get anywhere on the mortgage interest deduction,” Hatch said, referring to Trump. The Senate’s top tax writer said he doubted there would be major changes “except that there might be some way of saying that for multiple homes you’re not going to be able to deduct.”

Hatch noted that “there’s some room to do something there, but not much room.”

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One reason for the cautious approach taken by Hatch and Brady is the long history of firefights on the issue.

Interest deductions for various loans were rooted in the original tax code. The 1986 tax overhaul ended interest deductions for consumer loans, but kept them for mortgages. The Treasury Department estimates the mortgage interest deduction will cost about $949 billion over 10 years, from fiscal 2016 to fiscal 2025.

Two years ago, Ways and Means Chairman Dave Camp was criticized for proposing to halve the loan principal cap on the mortgage interest deductions from $1 million to $500,000 as part of the Michigan Republican’s proposed tax rewrite.

Howard said his homebuilders’ group opposes any changes to limit the application of the mortgage interest deduction to second, or vacation, homes. He said such benefits are often claimed by “dual-income, middle-class American families with a cabin in the woods.”

While Mnuchin and other Trump advisers have promoted an itemized deduction cap, Hatch and Brady have been exploring other ways to winnow tax breaks.

Whatever happens, key lawmakers like Rep. Maxine Waters of California, ranking Democrat on Financial Services, are signaling plans to fight any new limits on the mortgage incentives.

“It is like motherhood and apple pie. The idea of getting rid of, further capping, et cetera, is not something that plays well with Dems or Republicans,” Waters said.

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