December 3, 2012 -- When politicians talk about closing tax loopholes, it seems like they're targeting greedy corporations. But they're also talking about Jaclyn Picarillo, 33, mom of two and American homeowner.
The home mortgage interest tax deduction is one of the biggest tax breaks available and it allows individuals to deduct the interest they pay to their mortgage company.
It has encouraged millions of Americans to become homeowners. But as lawmakers search for ways to control federal spending, reform the tax code and avoid the "fiscal cliff," there's a good chance they'll take a look at the mortgage deduction. It's worth more than $100 billion each year. All or part of that money could go a long way to finding the $1.6 trillion in additional tax revenue President Obama wants negotiators in Washington to agree to.
Picarillo, who lives with her husband, a three-year-old and a 15-month-old in Fairfield, Ct., a New York City suburb with both high housing costs and a high cost of living, bought her first home last year after previously renting. Picarillo and her husband decided to buy because they knew they were getting the tax break, and they used that money to renovate the home as well as make a down payment on a new car Picarillo needed.
The mortgage deduction has been fiercely guarded until now, although it costs the government over $100 billion a year by most estimates, because of the sentimental attachment to it and the idea that it helps middle class families afford homes. While those who benefit from the deduction, including homeowners and people in the real estate industry, are passionate about keeping the deduction in place, others say it should be eliminated because it overwhelmingly helps the wealthy and those who can afford to buy a home already.
"By getting rid of the [home mortgage interest tax deduction], I'm more likely to hold on to my car longer and less likely to hire a builder to improve the house," Picarillo said. "Why would you become a homeowner without it? There are so many worries with owning a home, many people might think it's easier to rent."
If Picarillo sounds savvy about the deduction, it's because she is. She is also in the real estate industry, working with her mother to sell homes in Fairfield County, which includes Westport, Ct., where some of the country's most expensive homes are located.
She says that many of her customers are "on the fence" about buying in a market that has been struggling the last few years.
Picarillo describes her family as "definitely middle class" and says without the deduction she will have to "work a lot harder" to maintain the lifestyle she currently has.
The deduction, which has been around in some form or another since 1913, overwhelmingly helps people in areas like the Northeast and metro areas with high home prices. Edward Kleinbard, the former chief of staff to the U.S. Congress's Joint Committee on Taxation, says it should be up for elimination or reduction because it just doesn't help the majority of Americans.
"The bottom 80 percent of America, which includes the middle class, is only getting 20 percent of the tax benefit," Kleinbard, who is also a professor at the University of Southern California Gould School of Law, explained. "That's a very top-weighted distribution and it doesn't apply to the middle class because by definition the middle class is the 50 percent."
The deduction can only help those families who choose to itemize their tax returns, which middle class home buyers often don't do. The wealthier often happen to be those who are shrewder about their taxes, who make sure to claim the deduction, and it's also frequently part of the pitch the realtor gives them in order to get buyers into a higher priced home. The interest deduction not only covers mortgages on primary residences, but also on second homes. The deduction can go up to $1 million for married couples, more than most families' mortgages.
"This is not about starter homes," Kleinbard said. "We are not talking about taking that first step on the real estate escalator which was the way we all looked at home ownership … tax benefits like the home mortgage interest deduction, it's not free money. It's a government subsidy by another name, so you have to ask, Are we getting the best value for the subsidy for this mechanism because it is a very expensive subsidy and the answer is no. What we end up doing is subsidizing upper income Americans buying bigger homes than they otherwise would and that is not sensible national housing policy."
But, what about first-time buyers like Picarillo, who credits the deduction with allowing her to buy her first home because she lives in an area that is more expensive than other areas of the country?
"Federal tax policy has to deal with the nation as a whole," Kleinbard said. "We don't have different tax rates for different people. Just because there is a higher cost of living in New York there can't be a different tax rate schedule than people living in Missouri."
Kleinbard says the income tax structure may "hurt people who live in high cost of living areas," but "that's your choice."
"And your wages presumably reflect that higher cost of living and that's why you are willing to take the trade off, but the United States tax policy can only have policy for the entire nation," Kleinbard said.
He added that he lives in Los Angeles where home prices are also sky-high and the elimination of the deduction would hurt him personally, but "we need the money. How are we going to get the money?"
"From the point of view of the federal tax policy, there is one policy for the whole country," Kleinbard said. "Is this a useful way to be spending money we don't have to raise taxes on all Americans somewhere else?"
For those who want to protect the deduction like Picarillo and her mother, Debra Gailhard, also a realtor with Waterfront and Estate Properties in Connecticut, say it could have serious reverberations on a housing market that is already struggling to rebound. Gailhard said she counsels young buyers to stop renting and buy because of the break.
"That young bunch, they go to their mother and father and say, 'Hey is this a good investment? Buying a house?' And mothers and fathers say, 'Yes, you get an immediate write off on your taxes ... it's better than renting,'" Gailhard said, adding she's afraid if it were eliminated it could "affect the whole industry."
"We are just climbing out of our hole," Gailhard said. "If the housing market continues to be robust it keeps people working … but if this is just the little catalyst that turns [the housing market] down our whole economy is affected."
Connie Trolle, a realtor with Litchfield Hills Properties in Litchfield, Ct., an area where many people are buying second homes, says it may be the wealthy taking advantage of the deduction, but those are the same people who are stimulating the economy. Referring to a customer of hers who bought a $4 million home and will take advantage of the break, she said, "It's certainly stimulating the economy here. He remodeled the house and kept people working."