This year, the political scene has been nothing but bad. With the proposed tax reform that would get rid of or reduce the mortgage interest deduction, it looks like it will boil over.
Changes to taxes or raising taxes
The two political parties are talked about in an old saying. Republicans cut taxes, while Democrats raise them. In both cases, we pay more money in the end. In a very brave move, a committee with members from both parties is pushing for tax reform that would get rid of the popular mortgage interest deduction.
President Bush told the group working on tax reform to make the tax code, which everyone agrees is a mess, easier to understand. You might not know this, but on average, two new sections of code are added every day. One of the biggest problems is the Alternative Minimum Tax, which was made to make sure that very rich people didn't try to avoid paying taxes. The AMT now affects a lot of people because it was not written well. How do you make up for a tax that brings in millions of dollars for the government? That's the problem.
The answer from the committee is to go after the tax break for mortgage interest. The committee has come up with two plans, and here we will look at the first one.
In the first plan, the mortgage interest deduction would be lowered to a number that is tied to the size of the loan that the FHA will back. The FHA was made to help people with low incomes buy homes, so the real limit on the deduction would be very low. Most single-family homes in San Diego cost more than $600,000. Since the FHA limit for the city is about $315,000, homeowners would lose about half of their deduction. In areas with expensive homes, this will mean that many people won't be able to make their mortgage payments, which means they won't be able to keep their homes. The housing market boom will end when people don't pay back their loans. Many people will go upside down on their loan when they lose equity, which will be another disaster.
If Congress tries to put a limit on how much you can deduct for mortgage interest, chaos will break out. It's hard to see how politicians would choose this option.
