Ideas to cut the federal deficit could cost homeowners billions

Reporting from Washington â€”  You might assume that during August, with the Senate and House on their summer break, nothing much happens on Capitol Hill. You know the old saw: Your money is safe when Congress is out of town.

But that’s not quite the way it works. Committee staffs, economists, tax lawyers and policy shapers never really leave town. For example, the nonpartisan Congressional Budget Office this month delivered its latest revenue-raising options for Senate and House consideration as they write this fall’s tax and budget legislation.

Tucked away in the report are several plans that could -- if adopted -- cost homeowners billions of dollars. Although not formal legislative proposals, the CBO’s options represent a handy fiscal menu for legislators to pick and choose from to reduce the federal deficit or to pay for new programs they might want to advance.

Tops on the CBO’s hit list for housing: Slash deductions for homeowner mortgage interest from the present $1.1-million limit to $500,000, phased in with $100,000 annual reductions starting in 2013.

Taxpayers now can write off mortgage interest on their principal home debt up to $1 million and on home equity debt up to $100,000. Under the CBO’s option, that maximum mortgage debt amount would shrink yearly until it hit $500,000. Over a 10-year period, this change would boost tax collections by an estimated $41 billion.

The CBO offered up a second option if Congress wants to raise a lot more money: Replace the mortgage interest deduction with a flat 15% tax credit for everybody with mortgage amounts below the declining limits in the first option. Rather than taking write-offs tied to income tax bracket, every homeowner would get a credit worth 15% of mortgage interest paid.

Who would benefit? Primarily lower- and moderate-income taxpayers who don’t itemize on their returns. Who would pay more? People with big mortgages and higher-than-average incomes, who are more likely to itemize under current rules.

Credits reduce taxes dollar for dollar at the bottom line of returns. Deductions, by contrast, are tied to taxpayers’ marginal brackets. The higher the bracket, the bigger the percentage of the write-off.

The CBO notes this idea is not something it dreamed up. Four years ago, a tax reform advisory commission appointed by President Bush came up with a similar recommendation to transform the mortgage deductions into a credit.

The attractiveness of the credit concept is both fiscal and social. Besides raising $13 billion in 2013, the CBO estimates that moving to a credit approach would increase revenue by nearly $390 billion from 2013 to 2019. The credit plan would also please critics who say the current tax system shortchanges lower- and moderate-income homeowners and encourages Americans to buy massive houses loaded down with monster-size mortgages.

Although the CBO concedes that this option might also have negative side effects on the real estate market, it’s not clear whether it would affect the national rate of homeownership. Why? The report notes that Canada, Britain and Australia all have homeownership rates similar to those in the U.S., but none provides mortgage interest tax deductions.

Other items on the CBO’s revenue-raising target list:

* Get rid of all write-offs for state and local taxes, including property taxes. That would pump $343 billion into federal coffers from 2010 to 2014, and $862 billion by 2019.

* Clamp a 15% cap on the value of all itemized deductions -- not just mortgage interest and property taxes but also charitable contributions, medical expenses and casualty losses. The revenue windfall: $1.3 trillion over 10 years.

* Revert to the capital gains approach that prevailed before 1987. Rather than taxing most gains at 15% as the current code does, the CBO plan would exclude 45% of gains from taxation and tax the remaining 55% at an individual’s regular tax rate. New money raised: $48 billion over the next decade.

Where’s all this headed? That depends. The mortgage interest deduction has been a political no-go zone for decades. The same for local property tax write-offs. But with billowing deficits, and trillions to raise to help pay for healthcare reform and the economic stimulus bills, Congress is going to be pressed to increase revenue.

Even no-go zones could get new scrutiny.

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Distributed by the Washington Post Writers Group.