Budget Cutting and Tax Reform: What Should Be On or Off the Table?

By: Dr. Lynn Reaser

As Congress prepares to appoint its “Super 12” committee of its members to address the nation’s looming debt problem, a number of options are already percolating to both reduce the growth of spending and reform our tax system.  One question has already surfaced:  Should Congress include a cap on mortgage interest deductions as part of its next phase of budget cutting?

It would seem that the answer should be “yes.”  A cap on mortgage interest deductions should be considered along with other options to reform a complex, inefficient, and inequitable tax code.  The tax deduction for mortgage interest favors home owners to the disadvantage of renters and has been a factor contributing to some of the “booms” and “busts” we have suffered in the U.S. housing market.

A cap could limit the deduction to only primary residences or put value limits on the size of the deduction.  The impact might be relatively small since many buyers of high-end properties are now paying fully in cash.  The advantage of the deduction also is often offset significantly by the Alternative Minimum Tax.

It would, however, be important to phase such a cap in only gradually to give people time to adjust and to wait until around 2014 when most of the foreclosed homes should have been absorbed into the marketplace and home prices should have at least stabilized.

It should be emphasized that the real solution to the U.S. debt problem will require a slowing of the future rise in Social Security, Medicare, and Medicaid.  Congress should focus its attention and political capital on those issues.


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