The final report of a bipartisan deficit reduction commission recommends scaling back the tax break homeowners with mortgages have enjoyed for decades, and questions exemptions like those granted to homeowners when they sell their homes for a profit.

Although the full 18-member commission is not expected to adopt the report when it meets Friday — it includes many other controversial recommendations, and 14 votes are needed to make it official — the 66-page document could serve as a blueprint for future attempts at tackling the deficit.

The National Association of Realtors blasted the report today, claiming any changes to the mortgage interest deduction could depreciate home prices by up to 15 percent, and promising to "remain vigilant in opposing any plan that modifies or excludes the deductibility of mortgage interest."

The final report of a bipartisan deficit reduction commission recommends scaling back the tax break homeowners with mortgages have enjoyed for decades, and questions exemptions like those granted to homeowners when they sell their homes for a profit.

Although the full 18-member commission is not expected to adopt the report when it meets Friday — it includes many other controversial recommendations, and 14 votes are needed to make it official — the 66-page document could serve as a blueprint for future attempts at tackling the deficit.

The National Association of Realtors blasted the report today, claiming any changes to the mortgage interest deduction could depreciate home prices by up to 15 percent, and promising to "remain vigilant in opposing any plan that modifies or excludes the deductibility of mortgage interest."

As it’s structured now, the mortgage interest deduction allows homeowners to claim an itemized deduction for interest paid on total mortgage debt of up to $1 million on both their principal and second homes.

Critics of the tax break to homeowners say the policy amounts to a government subsidy of homeownership that benefits the wealthy the most, since those in the highest tax brackets get the biggest deduction.

In testimony before the commission, the National Low Income Housing Coalition maintained there are "extreme inequities" in the federal government subsidies for housing and mortgage markets, at the expense of renters.

Although only about one-third of taxpayers claim itemized deductions, the mortgage interest deduction alone cost $86 billion in lost revenue in fiscal year 2009, the group said, and is projected to cost $135 billion by 2013.

In taking aim at hundreds of tax breaks that reduce tax revenue by more than $1 trillion a year, the commission’s final report recommended that the mortgage interest deduction be changed to a 12 percent nonrefundable tax credit. Only interest paid on debt of up to $500,000 on a principal residence would be eligible.

Although the report recommended preserving the Earned Income Tax Credit (EITC) for low- to moderate-income workers and the child tax credit, it recommended scaling back tax breaks for health care expenses, retirement savings and charitable giving.

The report also recommended eliminating "nearly all other" deductions, exemptions or credits currently in the tax code — more than 150 in all.

That would presumably include the current exclusion from capital gains taxes on the first $250,000 (for individuals) or $500,000 (for families) in profit on the sale of a principal residence.

Although the National Commission on Fiscal Responsibility and Reform is not expected to adopt the report, Congress has been weighing proposals to modify the mortgage interest deduction for years.

Speculation that the mortgage interest deduction would be changed — a prospect raised when the commission issued a draft version of the report — has already had "a chilling effect on some potential homebuyers," NAR President Ron Phipps said in a Nov. 16 letter to commission co-chairs Erskine Bowles and Alan Simpson.

"Some consumers already believe that the MID will not be available to them," Phipps said. "Your recommendation has sown the seeds of uncertainty as even current owners fear that they will not be able to claim the MID and that their homes will lose even more value."

In 2005, a Tax Reform Panel recommended converting the mortgage interest deduction to a 15 percent tax credit on mortgage debt of up to $400,000.

The Congressional Budget Office estimated that change would have generated $418.5 billion in tax revenue between 2008 and 2017.

A member of the 2005 panel, James Poterba, argued that if less money were invested in owner-occupied housing, more money would be invested in "more productive" assets such as stocks and equipment.

"We are aware of no evidence showing that owning stocks, bonds or equipment provides the foundation for vibrant community life or an impetus to encourage good schools, nor does such ownership foster lower crime rates or contribute to the tax base of local governments," Phipps said of such arguments.

A 15 percent tax credit would have harmed taxpayers in higher tax brackets, creating "more losers than winners," Phipps said. Changing to a tax credit now would hurt housing prices — an "unacceptable" outcome in the wake of declines of the recent years, he said.

The idea that homeownership is a tool for building wealth is the foundation of NAR’s "Home Ownership Matters" public relations and lobbying campaign, aimed at protecting the mortgage interest deduction and other subsidies for homeowners.

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