Obama Budget May Tackle Housing Reform

NEW YORK ( TheStreet) -- The housing industry will be paying close attention to President Obama's budget proposal to be announced Wednesday morning.

With the Administration targeting a $1.8 trillion reduction in the deficit over a ten-year period, the government's significant subsidy to the housing sector may be on the chopping block.

Among the most costly tax subsidies is the mortgage interest tax deduction, which the Joint Committee on Taxation estimates will reduce revenues by $70 billion in 2013 and by $379 billion between 2013 and 2017.

Homeowners can currently deduct interest payments on home mortgage balances up to $1 million from their taxable income. They also can deduct interest on home equity loans of up to $100,000. Within these caps, taxpayers can claim deductions on up to two homes.

The mortgage interest deduction, however, is an "itemized" deduction that only a third of American tax filers are said to claim. Most middle-class households do not itemize their deductions. Rather they just take a standard deduction - capped at $6,100 for a single person and $12,200 for a couple.

Still, realtors believe that the subsidy plays an important role in promoting homeownership. Previous proposals to alter or eliminate the deduction have been met with howls of protest from the housing lobby, who argue that the elimination of the tax break would hurt the fragile housing recovery.

Mortgage Interest Deduction, An Unfair Subsidy

However, there has been growing support for reforming the deduction in recent years, as critics argue that the tax breaks unfairly favor the rich more than the middle-class.

Jared Bernstein, Senior Fellow at the Center on Budget and Policy Priorities(CBPP) calls the deduction "a picture of an expensive, inefficient, and unfair tax break."

He points to a recent CBPP paper that shows the bulk of the deductions go to higher income households. In 2012, 77% of the benefit went to households with incomes greater than $100,000. Some 35% of the benefit went to households with incomes greater than $200,000.

Higher income households are able to deduct more from their taxable incomes because they tend to take bigger mortgages and therefore pay more in interest. Their absolute savings in tax as a result of the deduction is also higher than middle-class households, due to their higher income tax bracket.