K Street scrambles to protect mortgage-interest tax break

The president’s tax-reform panel held its final meeting yesterday under a cloud of criticism from conservative tax activists as well as the real-estate industry, which fears that the panel’s plan to call for limiting the mortgage-interest tax deduction will be a huge economic blow.

Taxpayers can deduct interest paid on up to $1 million in mortgage loans, but panel members revealed last week that they would suggest new caps as low as $312,000, which would dramatically increase taxes on middle-income and wealthy homeowners and homebuyers in high-end Northeast and West Coast areas.

Lobbyists immediately began issuing a barrage of letters to protest changing a deduction that has fueled record home purchases and record housing-market profits.

“It would have a chilling and potentially devastating effect on home prices across the board,” said Bob Davis, executive vice president of America’s Community Bankers (ACB). “I just can’t imagine that the support of homeownership for middle-class Americans will be abandoned, especially in the range where the proposed reduction would hit.”

The ACB on Friday wrote to former Sens. Connie Mack (R-Fla.) and John Breaux (D-La.), whom President Bush tapped to lead his tax-reform panel earlier this year, asking that the panel drop the change in the mortgage-interest break from consideration. The National Association of Homebuilders, National Association Realtors (NAR) and Mortgage Bankers Association (MBA) also have been actively fighting the idea of curbing the deduction since its initial proposal.

In a letter, NAR President Al Mansell underscored the aftershocks felt by the already volatile housing market in the wake of the first reports regarding the tax-reform panel’s recommendations. The uncertainty over what specific cap the panel hoped to impose, Mansell said, has led to conflicting media reports and confusion among real-estate agents and homebuyers.

“The panelists must understand that limiting or eliminating tax benefits will have an adverse impact on housing markets and the value of housing,” Mansell wrote.

The uncertainty that concerns Mansell and many lobbyists centers on several panelists’ preference for using the Federal Housing Administration’s maximum mortgage-insurance levels as a model for the new deduction. The FHA maximum fluctuates based on year and location, meaning that the cap would vary widely for individual taxpayers.

During yesterday’s meeting, the panel also included the martgage-interest break in a list of deductions it wants converted to credits.

“This is a full-scale assault on middle-class homeowners, and we need even at this early moment to indicate to the president that we’ll bear any burden to defend against it,” said Rep. Steve Israel (D-N.Y.), who represents Long Island’s perennially packed housing market. “We ought to take a look at the lavish [tax] giveaways we give to huge corporate interests.”

Israel, along with Rep. Katherine Harris (R-Fla.), is circulating a “Dear Colleague” to generate a congressional outcry against the tax panel’s plan, and the Congressional Real Estate Caucus is working on a similar effort.

Israel noted the irony cited by many fans of the deduction: Limiting mortgage-interest tax breaks would be necessary to pay for a revenue-neutral repeal of the alternative-minimum tax, or AMT. But the AMT hits many of the same blue-state, middle-class taxpayers who take advantage of the mortgage-interest deduction in the first place.

“They’re robbing Peter to pay Paul,” Israel said.

Mortgage interest was the top deduction on individual returns for 2002, with homebuyers claiming $337 billion in tax benefits from their mortgage payments, according to the Internal Revenue Service. Though the tax-reform panel’s other big idea — restricting employers’ ability to deduct worker healthcare expenses — is just as politically unpopular, the mortgage-interest change has met with near-universal dissent.

“I haven’t heard anyone on the Hill say it’s a good idea yet. It’s being treated as a trial balloon, and the reaction of members of Congress and industry groups and consumers is being measured by the public record,” said Erick Gustafson, vice president of government affairs at the MBA.

One of the panel’s few cheerleaders is The Washington Post, whose editors praised Mack, Breaux and their cohorts earlier this week for having the courage to call for eliminating politically popular tax breaks.

“You can promote homeownership without promoting mansion ownership,” the Post said.

Mack and Breaux have good reason to shy away from the corporate-tax increases that Israel suggested. Breaux now works for Patton Boggs, whose clients include Mars Inc., Wal-Mart and Abbott Labs, and Mack advises the lobbying team at King & Spalding, which represents Bacardi and R.J. Reynolds.

The tax-reform panel began its work in January with a potentially sweeping mandate. Bush often has singled out revamping the tax code as one of his major policy goals for his second term, and Congress’s failure to reach consensus on politically incendiary changes to Social Security had many on the Hill looking to tax reform as an issue to unite the GOP in 2006.

But the panelists’ targeting of the mortgage-interest deduction is only the latest in a series of moves that have disappointed the conservative community. In an echo of the right wing’s frustration over the Supreme Court nomination of Harriet Miers, anti-tax activists are aggressively questioning the president’s commitment to the large-scale tax shifts they had expected the panel to embrace.

“This seems to reveal the usual Ways and Means [Committee] mindset of how to more efficiently shear the taxpaying sheep, instead of the fundamental reform this panel was tasked with,” said Ken Hoagland, spokesman for Americans for Fair Taxation, a Houston-based grassroots group that lobbies for the abolition of the IRS and its replacement with a complex tax code known as FairTax, centered on a national sales tax.

The group’s congressional patron is Rep. John Linder (R-Ga.), who has attracted 41 co-sponsors but little legislative buzz to his bill creating a FairTax-style tax system. That has not stopped the group from amassing against the tax-reform panel before its final report hits the president’s desk at the end of this month, starting with a press conference yesterday that brought seven other tax-activist groups to its side.

In an interview with The Hill last month, as the firestorm of criticism was beginning, Mack acknowledged the difficult road the tax panel would face.

“The bit of advice we got,” Mack said, “is that you need to understand that in this process there are going to be winners and going to be losers, and you have to be prepared for that.”

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