In the 109 th Congress, tax reform was a major legislative issue. In January 2005, President Bush appointed a nine-member bipartisan panel to study the federal tax code and to propose options to reform the code. In a pure consumption tax system, income tax credits and deductions, like the mortgage interest deduction, would be eliminated. The Tax Relief and Health Care Act of 2006 ( P.L. 109-432 ) temporarily allowed, for tax year 2007, mortgage insurance premiums paid for a personal residence to be tax deductible as mortgage interest. The Mortgage Forgiveness Debt Relief Act of 2007 ( H.R. 3648 ; P.L. 110-142 ) extended that temporary provision through the end of 2010. Fundamental Tax Reform and Legislative Developments in the 109th Congress

Several tax reform proposals were introduced, most of which proposed to enact fundamental tax reform by changing the tax base from income to consumption. The nine-member panel appointed by President Bush produced a report in the fall of 2005 that included a proposal to change the mortgage interest deduction. The remainder of this report describes the deduction for home mortgage interest and explores rationales for subsidizing homeowners. The report then provides an economic analysis of the value and performance of the deduction and concludes with a discussion and analysis of the possible changes to the mortgage interest deduction that could occur under different tax reform scenarios. One study found that the deduction for mortgage interest subsidizes housing consumption, but its impact on homeownership rates was minimal. Alternatively, Congress may choose not to alter the mortgage interest deduction. 1040 and S. 1099 ) would have eliminated the mortgage interest deduction. Other Options

There are many possibilities that Congress could choose to modify the mortgage interest deduction. If the deduction were eliminated as a result of fundamental tax reform, the resulting effects would depend on a variety of variables. These variables include the nature of tax reform, the resulting changes in the tax base and tax rates, changes in interest rates, and other economic variables. If the deduction were eliminated without other tax policy changes, federal income tax revenues could increase, the tax base could be broadened, and the federal budget deficit could be reduced. Modifications to the mortgage interest deduction could also have several effects. Congress could choose to allow the deduction for only one residence, rather than two, or reduce the allowable principal debt from $1 million to some lower amount, perhaps $500,000. These changes would reduce the amount of tax revenue loss associated with the provision without adding complexity to the tax code. Congress could also choose to improve the equitable nature of the provision by allowing more low income households to claim mortgage interest, either as an above-the-line deduction or as a tax credit. Finally, the mortgage interest deduction could remain unaltered.
The mortgage interest deduction, which is one of the largest sources of federal tax revenue loss with an estimated annual cost of $72 billion, is intended to encourage homeownership. Empirical studies suggest that the mortgage interest deduction subsidizes mortgage lending, which has more impact on housing consumption than homeownership rates. Other homeownership subsidies, like down-payment assistance programs, are proven to be more effective at increasing homeownership among lower-income families and are less expensive than the mortgage interest deduction.
A recent enhancement to the mortgage interest deduction was enacted in the Tax Relief and Health Care Act of 2006 (P.L. 109-432),which temporarily allowed, for tax year 2007, mortgage insurance premiums paid for a personal residence to be tax deductible as mortgage interest. The Mortgage Forgiveness Debt Relief Act of 2007 (H.R. 3648; P.L. 110-142) extended that provision through the end of 2010.
Early in the 109th Congress, tax reform was a major legislative issue. President Bush appointed a bipartisan panel to study the federal tax code and to propose options to reform the code. The panel produced a report in the fall of 2005 that included a proposal to change the mortgage interest deduction. Legislation for fundamental tax reform was introduced, and some bills proposed to change the tax base such that income tax credits and deductions, like the mortgage interest deduction, would have been eliminated. Late in the first session of the 110th Congress, House Ways and Means Committee Chairman Rangel indicated that fundamental tax reform might still be considered in the 110th Congress.
There are many possible options to alter the mortgage interest deduction. If the deduction were eliminated as a result of fundamental tax reform, the resulting effects would depend on a variety of variables, including the nature of tax reform, the resulting changes in the tax base and tax rates, changes in interest rates, and other economic variables. If the deduction were eliminated without other tax policy changes, federal income tax revenues would increase, the tax base could be broadened, and the federal budget deficit could be reduced.
Modifications to the mortgage interest deduction could take any one of several approaches. Congress could choose to allow the deduction for only one residence and/or to reduce the allowable principal debt, which is currently $1 million. These changes would reduce the amount of tax revenue loss associated with the provision. Congress could choose to improve equity by allowing more low-income households to claim mortgage interest, either as an above-the-line deduction or as a tax credit. Finally, the mortgage interest deduction could remain unaltered.
This report, which will be updated to reflect legislative developments, describes the deduction for home mortgage interest, provides economic analysis, and concludes with possible changes to the mortgage interest deduction and the potential impacts of those changes.