WASHINGTON – Only a small percentage of U.S. taxpayers benefit from the ability to deduct mortgage interest on a second home. That group just happens to include many of the people who craft the nation’s tax laws.
Members of the congressional tax-writing committees are eight times more likely than the average American to own a second home with a mortgage, casting doubt on their eagerness to curb the tax break, according to data compiled by Bloomberg News.
U.S. lawmakers are an ideal market for second homes: They’re wealthier than the typical person and they live and work in two places – their home states and Washington. That will shape their approach to revising the tax code, said Bill Allison, editorial director of the Sunlight Foundation in Washington, which promotes government transparency. “What you end up seeing out of Washington is a real disconnect between how Congress lives in Washington as one of the most affluent areas now, and how the rest of the country lives,” Allison said.
The Senate Finance and House Ways and Means committees are exploring the first rewrite of the U.S. Tax Code since 1986, and the chairmen of both panels have promised to scrutinize every tax break. As lawmakers try to lower marginal rates, that examination will include the estimated $8 billion a year that they could raise from ending the mortgage deduction for a second home.
The lawmakers will start that process coming from a different financial place than many of their constituents do. More than 40 percent of members of the House Ways and Means and Senate Finance committees have mortgages on homes other than their primary home-state residences. About 5 percent of all homes in the nation are second residences, according to the National Association of Home Builders.
Among those holding mortgages on a second home are Rep. Tom Reed, R-Corning, who owns a cottage on Keuka Lake in the Finger Lakes. “We’re like millions of Americans,” Reed said. “I have been very sensitive to recognizing mortgage deduction as a policy, a good real estate policy for America. It doesn’t sway me from a personal perspective. It’s about good policy.”
Reed, 41, said he and his 11 siblings inherited the lake cottage in his district from his mother. That arrangement didn’t work well, and he borrowed money to buy them out. He now owes between $100,000 and $250,000 on the cottage and between $50,000 and $100,000 on his primary home in Corning, where he was mayor before coming to Congress in 2010.
“This long-standing tradition is something that if we move away from we should do it very carefully,” he said. “And we should do it in a very well-thought-out manner.”
The mortgage interest deduction, with an estimated cost of $72 billion in forgone revenue in 2014, is one of the largest tax breaks in the Internal Revenue Code and the subject of a real estate industry lobbying campaign to protect it.
Taxpayers can deduct interest on mortgages of up to $1.1 million on as many as two homes, a “main home” where they live most of the time and a second home. At least for voting purposes, lawmakers declare their primary residences in their home states.
A rule that would constrain the deduction to primary residences would limit the break for them; a rule that limited the break to one home only would let some of them continue to benefit.
The Internal Revenue Service doesn’t require taxpayers to break out their mortgage interest by home, and the agency doesn’t have data on the cost of the break. The nonpartisan Tax Policy Center offers a rough estimate that repealing the deduction could generate $8 billion a year for the government. More than half the benefit of the mortgage interest deduction overall goes to taxpayers making between $75,000 and $200,000, according to the Tax Policy Center. It’s only available to those who itemize their deductions.
The tax break for a second home was one of the few that Mitt Romney, the 2012 Republican presidential nominee, suggested could be ended to pay for lower tax rates. It’s one of the specific ideas lawmakers offer when asked what breaks should disappear.
“If you want to know why it’s there, it’s there because of heavy lobbying,” said Dennis Ventry, a tax law professor at the University of California at Davis, who cites the influence of lawmakers from resort areas and not any real benefit in promoting homeownership. “So much of our homeownership subsidy has this component to it, this visceral symbolic component.”
Jamie Gregory, deputy chief lobbyist for the National Association of Realtors, said the “light bulb finally goes off” for lawmakers when they’re presented with data showing that 900 of the approximately 3,100 counties in the United States have more than 10 percent of their housing stock as second homes, according to the Realtors group.
“As you start walking members through that, there’s a realization that this isn’t just some flip throwaway,” he said. “I really do believe members make their decisions more based on their districts than on what’s personally best for them.”
But the break is in more jeopardy than at any time in the 27 years since Congress last revamped the tax code. Senate Finance Chairman Max Baucus, D-Mont., who doesn’t have a mortgage on his family’s primary home in Montana but does have one on his Washington townhouse, wants lawmakers to examine every tax break and is asking senators to make suggestions by Friday.
“Every provision we put back in the code,” he said, “needs to have a reason for being there.”