Tax panel seeks cap on break for homeowners

"The loophole", which along with other tax breaks for homeownership costs the US Treasury about $100bn (€83bn, £57bn) a year in lost revenue, disproportionately benefits wealthier Americans.

George W. Bush had instructed the panel upon its formation to take account of “the importance of homeownership and charity in American society”, a statement that led some to suggest that tampering with existing generous incentives for property ownership would be taboo.

But in the final weeks of its deliberations it is leaning towards curbing the tax privileges of higher-end homeowners.

The committee, which is to present its final findings by November 1, has been searching for ways to plug a hole in government finances that would be left by the abolition of the Alternative Minimum Tax, a parallel tax system that the panel is recommending be scrapped. This has led them to look at housing and healthcare, the two most costly deductions.

Jim Poterba, an economics professor at MIT and a member of the panel, said there was only shaky evidence that the existing system encouraged homeownership and a strong case that it led to overinvestment in residential property to the detriment of other investments. Under existing tax law, mortgage interest payments on loans of up to $1m are deductible. About a fifth of this benefit goes to the wealthiest 2 per cent of households, since they pay higher marginal tax rates and tend to take larger loans.

Charles Rossotti, senior adviser to the Carlyle Group, the investment firm, and a member of the panel, says the system tends to encourage the construction of bigger houses rather than an increase in the number of people who own their home. The panel is now considering where to recommend capping the tax deduction. Given wide regional variations in US home prices, it said, it would consider caps based at a certain level above local median prices.

However, it warned that any abrupt move to curb tax benefits for housing could be disruptive and unfair. Prof Poterba suggested that it could even consider leaving intact the existing tax structure for the life of existing mortgages.

The panel was almost unanimous in arguing that the existing tax structure for healthcare also needed to be overhauled. Individuals are not currently taxed at all on employer-provided healthcare coverage, which has created the single largest tax loophole in the US code, costing the Treasury $125bn a year. That may have contributed to runaway price rises in the healthcare system, the panel said, with some companies offering employees costly insurance plans in part because of their tax-privileged status.