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Middle-Class Mortgage Break Part of Debt Talks

Washington — U.S. lawmakers are looking for ways to carve up the $70 billion-a-year home mortgage interest deduction.

What they’re finding is a political challenge that might not yield much revenue for reducing the budget deficit or lowering tax rates and may not be worth the outcry from taxpayers making $75,000 to $200,000 a year.

A variety of ideas are being discussed to curtail the break without ending it. Options include lowering the $1 million cap on the size of deductible loans, eliminating the benefit for second homes and imposing limits on top earners’ itemized deductions, including mortgage interest.

Still, any plan that generates significant revenue would pinch the housing industry and upper-middle-class voters. Real estate agents and homebuilders are in every congressional district, and more than half the benefits of the tax break go to households earning between $75,000 and $200,000, the homeowners both parties are pledging to protect.

“It’s so woven into our economy that it’s hard to do without having economic dislocation that produces more pain than the revenue gained,” said former Rep. Earl Pomeroy, D-N.D.

In 2011, 36 million households claimed $359 billion in mortgage interest deductions, according to the IRS. That was down from 37 million and $387 billion the year before.

The most detailed discussions about the deduction are happening in the House, where the tax-writing Ways and Means Committee has broken into 11 bipartisan working groups to study ways to rewrite the U.S. tax code. The groups are wrapping up their work by April 15.

The committee plans to release and pass a bill this year. Republicans emphasize their willingness to consider anything while not yet proposing anything specific.

Narrower options, such as ending the deduction for second homes, could raise about $8 billion a year. Converting the deduction into a 15 percent credit and capping indebtedness at $500,000 would yield $24 billion a year by 2019 and cause about half of households earning between $100,000 and $200,000 to pay more tax, according to the nonpartisan Tax Policy Center.

Changes limited to the top 2 percent of earners or reductions to the $1 million cap would have the biggest effect in high-cost real estate markets, such as those in California, New York and New Jersey.

Four of the most 10 most expensive U.S. housing markets last year were in California, led by the San Jose metropolitan area, according to the National Association of Realtors.

What’s important is how the deduction fits in a tax plan designed to lower rates and promote U.S. economic growth, said Rep. Diane Black, R-Tenn., on Ways and Means, who said the second-home deduction is under scrutiny.

“The best thing for folks to get to be able to afford a house is a job and higher wages,” she said.

The mortgage interest deduction is a long-standing feature of the tax code and a survivor of the 1986 rewrite that prohibited taxpayers from deducting credit-card interest.