Former Labor Secretary Praises Bush’s Reform of Mortgage Tax Deduction

In a Los Angeles Times editorial, Robert Reich, a one-time Clinton administration cabinet member and current professor at Brandeis University, lauds the controversial home mortgage tax deduction limit recently introduced by President Bush’s tax reform commission. The former head of the U.S. Department of Labor and Massachusetts gubernational candidate says that the unlimited interest deduction enjoyed by homeowners is not untouchable and should be altered just as the administration recommends.

Homeowners can currently deduct all interest paid on mortgages written up to $1.1 million on their federal tax returns. This primarily benefits the rich, who can write off tens of thousands of dollars a year in what equates to an unneeded housing subsidy, Reich says. A deduction cap will save the U.S. Treasury billions of dollars and will not adversely affect the middle class, he adds. Bush wants to lower the $1.1M ceiling to the size of an average mortgage in any given area of the U.S. In other words, the $170,000 - $420,000 range, depending on your place of residence, according to current data.

Reich uses the following facts in support of the tax reform:

• Under the current system, a $10,000 interest deduction saves an individual in the highest tax bracket $3,300, while the same deduction equates to only $1,500 for those in middle-class income brackets.
• Americans with modest incomes ($20,000 - $60,000 annually) are likely to opt for the standard federal tax deduction, remaining unaffected by the proposed change. Bush’s proposed 15 percent tax credit will also proportion savings fairly and equally.
• Mortgage interest tax write-offs totalled $63 billion last year, mostly going to wealthy Americans. Meanwhile, the entire budget of HUD (the government agency whose mission is to provide affordable and lower-income housing) was only $35 billion.

Reich warns, however, that actually seeing the reform enacted will take time - if it isn’t scrapped altogether. With Realtors and mortgage lenders up in arms over the proposed legislation and ready to fight it, and Bush’s political capital dwindling, there is no guarantee of such a drastic change coming to fruition, practical as it may be.