A commission appointed by President Obama to reform the tax code and reduce the nearly $14 trillion U.S. deficit submitted a proposal that included limiting the mortgage-interest tax deduction Wednesday. The National Commission on Fiscal Responsibility said the proposal would cut the deficit by $4 trillion by 2020 and to 2.3% of GDP by 2015. The deficit is currently at 62% of GDP, but Federal Deposit Insurance Corp. Chairman Shiela Bair warned last week that if no action is taken it could grow to 185% by 2035. The proposal, titled “The Moment of Truth,” is scheduled for a vote by an 18-member congressional panel Friday in a first step toward passing the reduction plan into law. Although some representatives have already voiced their support for it, only five on the panel need to vote against it in order for it to fail. The commission put out a first draft earlier in November. Of the many proposals inside the document, the most contested one for the housing industry will be the mortgage-interest tax deduction. The commission proposes for the deduction to be limited to principal residences only and that eligible mortgages be capped at $500,000 instead of the $1 million current cap. The commission also proposed a 12% nonrefundable mortgage-interest tax credit for all taxpayers. Right away the National Association of Realtors, the deduction’s staunchest supporter, voiced concern over possible limitations. NAR President Ron Phipps said any changes to the mortgage interest tax deduction for homeowners could drag prices and values down as much as 15%. NAR conducted a survey of nearly 3,000 homeowners and renters in October, and nearly three-fourths of homeowners and two-thirds of renters said the mortgage interest deduction was “extremely or very important to them.” “The tax deductibility of interest paid on mortgages is a powerful incentive for home ownership and has been one of the simplest provisions in the federal tax code for more than 80 years,” Phipps said. Mortgage Bankers Association Chairman Michael Berman said a rollback of the deduction would be “devastating.” “It would immediately stop in its tracks any stabilization we are seeing in the housing market and would effectively increase the cost of homeownership for millions upon millions of people.” John Burns Real Estate Consulting warned that reducing the cap would hurt move-up builders and a minority of expensive states dramatically. But the commission’s report said the era of debt denial is over. “In the weeks and months to come, countless advocacy groups and special interests will try mightily through expensive, dramatic, and heart-wrenching media assaults to exempt themselves from shared sacrifice and common purpose,” according to the report. “The national interest, not special interests, must prevail.” Write to Jon Prior.

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