The current Administration is again making plans to reduce or do away with the Mortgage Interest Deduction entirely.  This was proposed last year, and before that in 2005.  On those occasions cooler heads prevailed and the deduction was allowed to continue.  Now it looks like it’s up for review again.   The Administration figures it can “save” about $208,000,000,000.  Of course, 208 billion is a drop in the bucket in today’s budgets, still it is money, and given the governement’s love of spending, every dime they can squeeze out of Taxpayers R Us is grist for the mill.  And this is a government with exceptionally large and voracious mills.

The effect on the housing market will be devastating.  It is not bad enough that we have not yet recovered from the collapse of 2007, nor that banks are manipulating the market by controlling the shadow inventory, nor that mortgage applications have dropped 40% since the $8,000 Federal tax credit expired in April, 2010.  Having hung, drawn and quarted the housing industry nothing will do but to drop a white  phosphorus grenade into the remains. 

The thinking (if indeed it can be called that) is that this tax credit is an entitlement of the rich.  As we all know, the rich must be punished for having the bad grace to have actually earned wealth, thus helping out the “little guy”.  I don’t know about anybody else, but I’ve been around to see the rich punished in this way a time or two, I’m still waiting for my benefit. 

If that logic isn’t cockamame enough for you, the fact is that doing away with the Mortgage Interest Deduction is a tax increase that punishes home owners at all levels of the economic spectrum.  To start with, it will dis-incentivise millions of prospective homeowners by making their effective annual costs higher than they otherwise would have been.  Secondly, millions of home owners will find that they can no longer afford to own a home and give up home ownership either through forced sales or foreclosure.  It will drive the price of homes downwards, pushing more homeowners underwater and shoving those already underwater deeper.  Lower home prices will result in lower local tax revenues for schools and municipal services.  Oh, and it will reduce the Federal tax revenues which were being “saved” in the first place. 

LORD, save me from Congress saving me money.