TheMReport — News and strategies for the evolving mortgage marketplace.
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18 | TH E M R EP O RT FEATURE Seeing the Glass Half Full While the industry shudders at the thought of a change to the cherished mortgage interest deduction, the future of homeownership could stand to benefit from such a change. By Ron Terwilliger W hile nothing is inevitable in politics, comprehensive tax reform will likely rank high on Washington's agenda once a new President and Congress assume office in 2017. That means major changes to the mortgage interest deduction (MID) may be just around the corner. Contrary to conventional wisdom, the housing industry has the potential to benefit from the changes. But these benefits will be realized only if the homeown - ership and rental sectors of the industry work together to further key housing priorities. Speaker Paul Ryan's Passion for Tax Reform T ax reform has a powerful ally in new House Speaker Paul Ryan, who declared tax reform as one of his top goals just before his swearing in. Senate Majority Leader Mitch McConnell said that Ryan is so committed to reform he spends his nights "dreaming about tax policy." If Republicans maintain control of the U.S. House of Representatives following the 2016 elections, a likely prospect at this point, chances are the Speaker will be a major force pushing for an overhaul of the federal tax code. He will find willing allies among Republicans in a newly constituted Senate. And if a Republican is elected to the White House, tax reform will gain even more momentum. The objectives of reform will be to simplify the code and reduce overall individual and corporate tax rates. Achieving these goals in any meaningful sense won't be easy. It will require lawmakers to reexamine the major deductions, credits, and other "tax expendi - tures" that currently populate the code and around which strong and vocal constituencies have developed over the years. Reexamining the Mortgage Interest Deduction O ne of the biggest federal tax expenditures is the MID. Ac- cording to the Congressional Joint Committee on Taxation (JCT), in 2015 the MID cost the federal gov- ernment $71 billion in lost revenue. The projected price tag of the MID from 2015 to 2019 will reach nearly $420 billion, a huge sum. The MID ranks as the fourth- largest tax expenditure for individuals in the entire federal budget. It is an obvious source of revenue to offset what may be lost to the federal government by reducing overall tax rates, both in - dividual and corporate. No doubt, that's one of the reasons Speaker Ryan has proposed capping the amount of mortgage debt eligible for the deduction at $500,000, one- half its current limit of $1 million. Speaker Ryan also favors limit - ing the home mortgage tax deduc- tion to "middle income people." It's no secret that the MID disproportionately benefits higher- income households. Another JCT study found 77 percent of the benefits associated with the MID flow to households with incomes of $100,000 or more, while 35 percent of the benefits accrue to households with incomes of $200,000 or more. Conversely, households with annual incomes of $50,000 or less receive only three percent of the benefits. A major reason for this imbal - ance is the MID, like other tax deductions, is available only to the small fraction of households who itemize deductions on their fed - eral tax returns. The overwhelm- ing majority of households with annual incomes under $100,000 do not itemize but instead take the standard deduction. To expand the benefits of the MID, three high-level bipar- tisan advisory groups—the President's Advisory Panel on Federal Tax Reform, established by former President George W. Bush; the Bowles-Simpson Deficit Commission, estab - lished by President Obama; and the Bipartisan Policy Center's Domenici-Rivlin Debt Reduction Task Force—have all recommend - ed the MID be converted into a tax credit that would be potential- ly available to all filing taxpayers, not just those who itemize. Ensuring MID Savings "Stay at Home" L et's face it: Whenever the mortgage interest deduction is mentioned in the halls of Congress, the first instinct of many in the housing industry is to crouch in a defensive posture. With change imminent, it's time to take a more proactive ap - proach that views the prospect of MID reform not as a cause for trepidation but instead as an opportunity. The first step is for those in the homeownership and rental sectors of the industry to unite around a clear objective. We must work to ensure that any "savings" achieved