The “fiscal cliff” may seem like an abstract political argument, but it could have a direct impact on income taxes paid by Maine homeowners.
Among the items under discussion as legislators try to avert the automatic spending cuts and tax increases set to take effect Jan. 1 is the mortgage-interest deduction. The tax break allows homeowners to deduct interest paid on mortgages up to $1 million for a first or second home, as well as interest on home equity loans up to $100,000.
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Realtors say eliminating the tax deduction could have a huge effect on the housing market in Maine, which has the nation’s highest percentage of vacation homes.
“My buyers do calculate that savings into the equation. They don’t buy a home because of it, but it’s important to them,” said Tina Lucas, president of the Maine Association of Realtors. “We’re just having this seedling of growth. This is the worst time to be talking about taking it away.”
It’s still unclear whether reducing the mortgage-interest deduction, which saved taxpayers more than $80 billion in 2010, will be part of a fiscal cliff deal. Nor is it clear what the details of any reduction might look like. Both political parties have stayed away from discussing specific proposals to eliminate or reduce the deductions.
Without a specific proposal on the table — and with fiscal cliff negotiations occurring privately among congressional leaders — Maine’s two Republican senators were unwilling Thursday to comment specifically on whether the mortgage-interest deduction should be reduced.
“It would be premature for Senator Collins to comment because we still don’t know what will eventually be in a comprehensive package,” said Kevin Kelley, spokesman for Sen. Susan Collins. “But she does believe that Congress should tackle comprehensive tax reform. The goal of reform should be a simpler, fairer, pro-growth tax system to encourage economic growth.”
Sen. Olympia Snowe, who will retire from Congress in January, said it was “regrettable that the Congress has systematically failed to engage in comprehensive tax reform, as I have been arguing for over the past four years.”
“As such, leaders in Washington have a mere 32 days to avert the coming fiscal crisis,” Snowe said in a written statement. “I will thoroughly review the final plan that emerges from ongoing negotiations, including any proposed changes to the home mortgage deduction, and I urge those crafting a compromise plan to do so as expeditiously as possible to provide much-needed certainty to our nation’s taxpayers and businesses.”
Proposals to eliminate mortgage-interest deductions have come up before. Three years ago, the Congressional Budget Office proposed reducing the maximum mortgage cap for a deduction gradually over 10 years, to $500,000.
Opponents of the deduction contend that it largely benefits wealthier individuals who can afford to buy big homes with large mortgages, and that it fails to help lower-income families who can’t afford to buy a house or who are less likely to itemize deductions on their taxes.
Supporters, however, say the tax break encourages home ownership and gives a break to buyers, who then can pour that money into the economy in other ways.
The amount of the deduction varies. Assuming a homeowner purchases a house in Maine at the state median price of $170,500 with a 20 percent down payment, the mortgage loan would total $136,400. At an annual percentage rate of 3.75 percent, the mortgage would generate $5,072 in interest in the first year. That amount could be deducted from adjusted gross income before the income is taxed. The amount of interest owed decreases annually over the term of the mortgage.
Despite Maine’s relatively low household income compared with the nation as a whole, the state’s rate of home ownership is 73.1 percent, outpacing the national rate of 66.6 percent, according to the U.S. Census Bureau. The median household income in Maine from 2006 through 2010 was $46,933, below the national median income of $51,914, according to the Census Bureau.
Talk of changing the tax deduction comes after sales of existing single-family homes in Maine surged 24.55 percent in October from the same month last year, driven by pent-up demand, low interest rates and modest prices. The jump in Maine outpaced the 9.6 percent gain nationally in sales of single-family existing homes during the same period.
Realtors and home builders said they fear any reduction in the mortgage-interest deduction would put a chill on the housing market just as it starts to show signs of recovery.
“It will affect new home construction as demand falls, it will hurt current homeowners who use that money for remodeling, buying appliances or paying off debts. It’s going to affect the overall economy of the middle-class buyer,” said Ronald Boutet, a developer of the Dunegrass golf and condominium development in Old Orchard Beach.
“It’s scary for young people,” Boutet said. “When you start taking away deductions, it takes away money that you’d have to pay for other things like education for your children.”
One possible scenario is the elimination of the tax deduction for second homes. That would also have a drastic effect in Maine because vacation homes are a crucial part of Maine’s economy, real estate executives said.
“When you consider a person has a choice, they’ll most likely rent rather than buy if they don’t have a purchase incentive,” Boutet said.
At 17.2 percent, Maine leads the nation in vacation homes or homes owned for seasonal, recreation or occasional use, according to the Census Bureau.
“People think of second homes and they think oceanfront escape. But in Maine, second homes are small camps or cottages,” said Lucas, of the Maine Association of Realtors. “Most of the second homeowners in Maine are Mainers. The conversation is being framed as helping only the wealthy, but it helps average Maine families.”
Anthony Randazzo, director of economic research at the Reason Foundation, said the mortgage-interest deduction benefits wealthier Americans with annual salaries of more than $100,000 a year.
For example, taxpayers saved $83 billion by using the mortgage-interest deduction in 2010. Of that, $64.7 billion went to those making $100,000 or more, Randazzo said.
“Why even have it in the first place?” he said. “Politicians say it supports home ownership. But it’s not going to be the determining factor on them purchasing a home — maybe a bigger home — but it’s not going to determine whether they can buy a home at all.”
Staff Writer Jessica Hall can be contacted at 791-6316 or at:
jhall@mainetoday.com
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