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Winter 1-1-2006


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Included among President Bush’s Advisory Panel on Federal Tax Reform’s recommendations were three proposals related to the current home mortgage interest deduction. Instead of a deduction, the panel recommended a flat 15% credit. Instead of the current $1,100,000 mortgage caps, the panel recommended a mortgage cap based on the median regional price of housing. Finally, the panel recommended limiting the deduction to interest paid on only one home and eliminating the deduction for interest on home equity indebtedness.

The Panel Report praises the Tax Reform Act of 1986, albeit with a caveat: “While the 1986 Act was a historic event, it did not produce a lasting transformation of the tax system. The 1986 Act left in place or added various complicated tax benefits, including such items as exclusions for employer-provided fringe benefits, state and local tax deductions, tax-deferred annuities, new mortgage interest deduction rules, and complicated rules for determining alternative minimum tax liability. Many point to the 1986 Act as the high point of contemporary tax reform – and they may well be right – but its limitations suggest that truly sweeping comprehensive reform faces formidable political obstacles.

Both participants in the debate refer to the 1986 Act in discussing the Panel’s proposals relating to the tax treatment of home mortgage interest. Professor Deborah Geier argues for limits, questions the linkage between current tax benefits and homeownership, and explains why the Panel’s recommendations do not sufficiently encourage homeownership by low income taxpayers. Professor Stuart Lazar criticizes the Panel for undervaluing the effect on housing costs in many locales, using the 15% credit rate as a disguised means of raising taxes, and not explaining how it determined that the current mortgage deduction results in too little business investment.

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