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UNITED STATES - NOVEMBER 30: Rep. Keith Ellison, D-Minn., is interviewed in his Longworth office about his Muslim faith. (Photo By Tom Williams/CQ Roll Call)
Tom Williams/CQ Roll Call Rep. Keith Ellison (D-Minn.)
U.S. Rep. Keith Ellison has a game-changing tax fix that he think most Americans would happily get behind.

Ellison, the Democrat who represents Minnesota's 5th Congressional District, just proposed a bill that would revise the federal tax code, radically changing the way America's mortgage-interest deduction works.

Where you fall on the income scale will likely determine how you feel about Ellison's idea as proposed in The Common Sense Housing Investment Act.

Mortgage Interest Deduction Math

Right now, anyone with a home mortgage can write off the interest they pay on their federal income taxes. The calculation is simple: The amount you paid in interest for that year is subtracted from your income.

This is a big deal for many taxpayers. One estimate from The Wall Street Journal puts total federal tax savings at $100 billion a year. It's also a big deal to real estate agents and banks, as the tax write-off can be a major selling point for homes and home loans.

But to utilize the mortgage-interest deduction, you have to itemize your taxes, which not everyone can do. Enter Rep. Ellison and his Common Sense Housing Investment Act. His bill would open the mortgage-interest deduction to more taxpayers by changing how they claim it. Rather than taking whatever they paid in interest off their income, now homeowners would claim a standard 15 percent tax credit.

Under the Common Sense Housing Investment Act, the number of Americans able to claim the mortgage-interest deduction would jump from the current 43 million to 60 million.

Everyone Wins! Well, Almost Everyone

Perhaps the most interesting trick here is that the bill would allow more homeowners to claim a mortgage-interest deduction on their federal income taxes, but also allow more total tax revenue to be raised.

Ellison's plan would allow people to only deduct interest on mortgages up $500,000; after the half-million dollar mark, they couldn't deduct any mortgage interest whatsoever. According to Ellison, however, only 4 percent of homes nationwide sell for more than half a million dollars. So in the end, far more middle-class homeowners would be able to write off their mortgage interest, while the well-to-do would lose the tax break.

According to Ellison's calculations, his plan would generate an additional $196 billion in revenue over 10 years -- money he would earmark toward addressing what he calls a "national rental shortage" -- which mainly affects minorities, the elderly, and the poor -- by expanding the Low Income Housing Tax Credit and Section 8 rental assistance.

A Tempting Tax Target

The mortgage-interest deduction comes under attack every once in a while for different reasons.

In the wake of the financial crash, it was called out as a contributing factor in that it helped feed the general mentality that everyone should own a home, which in turn propelled us into the housing boom and bust. The mortgage-interest deduction has also been called out as a debt and deficit expander, because it causes the government to miss out on a lot of tax revenue.
Then there's the free-market economics argument that claims the mortgage-interest deduction is a market distorter. There's no logical reason the federal government should give homeowners the ability to write off their interest on a large purchase. Why don't car owners get to write off their car-loan interest, or boat owners their boat-loan interest?

In his documentary "The Ascent of Money," historian Niall Ferguson claims the federal government made the move to create a large class of property owners in the 1930s -- specifically, with the creation of the Federal Housing Administration -- in part as an effort to blunt the rise of communism and socialism in America.

But however you want to look at the issue, the bottom line is that it was decided a long time ago in this country to promote home ownership, and Americans are used to it. The real-estate and banking sectors don't want to see the deduction go anywhere, either.

So if the mortgage-interest deduction is here to stay, sure, why not open it up to more of the middle class? And then you can use the projected proceeds to help the less fortunate.

Most would see this as a win-win, probably except for the people at the top who have to pay for it.

John Grgurich is a regular contributor to The Motley Fool. Follow his dispatches from the bleeding heart of capitalism on Twitter @TMFGrgurich.


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nkdgolf

$500 K? Obviously this real estate mogul doesn't live in California.

March 31 2013 at 10:26 PM Report abuse +1 rate up rate down Reply
AYSKOFI

Another Robin Hood. Take from more productive people and give it to less productive people. In other words, increase the number of people feeding at the public trough.

March 31 2013 at 9:01 PM Report abuse +1 rate up rate down Reply
mayormackcheese

According to my CPA, regardless of the tax bracket, if you itemize, you get a generous 30% share of mortgage interest by the Federal Government. This deal is bad if the deduction is cut in half to 15%. Smoke and mirrors politicians.

March 31 2013 at 8:42 PM Report abuse +1 rate up rate down Reply
marine1942

Typical liberal, black, dem playing the class card.

March 31 2013 at 11:03 AM Report abuse +5 rate up rate down Reply
franzr00

There needs to be an adjustment on the $500K ceiling. In some places, that buys a mansion, but in other parts of the country is more what an average or even modest house costs.

But one place to start is that the deduction is only for your home, not your second home. And your second home has a rather broad description. For you to take a home mortgage interest deduction, your debt must be secured by a qualified home. This means your main home or your second home. A home includes a house, condominium, cooperative, mobile home, house trailer, boat, or similar property that has sleeping, cooking, and toilet facilities.

If you can afford a second home, you do not need taxpayers to subsidize it through your interest deduction.

As far as utilizing some of the money raised, perhaps funnel some of it into regulating the excesses of Wall Street, which, in 2008, almost collapsed the US economy. Yet no one is going to prison over it.

March 31 2013 at 9:45 AM Report abuse -1 rate up rate down Reply
ncrothe

Well, the idea seemed reasonable until he earmarked it for anythng other than reducung our national debt.

March 31 2013 at 8:50 AM Report abuse rate up rate down Reply
BULLMAN

Wonder where that leaves seniors?

March 31 2013 at 2:29 AM Report abuse rate up rate down Reply
stlboxmaker

Typical politician wants our money, is every one elected in Washington an idiot or a thief?

March 30 2013 at 9:07 PM Report abuse +6 rate up rate down Reply
Bill

So if your house cost $500,000 then you get a 15 percent credit but if it cost $500,001 then you get bupkis? That is a costly $1 you paid.

March 30 2013 at 8:49 PM Report abuse +3 rate up rate down Reply
brokedogleg

My home cost no where near a half million and I can't deduct my mortgage interest. Me, my wife and my house ... where's my tax break? You're just trying to sucker a lot of people to make it look like you're trying to do something to help us. How about we go for real tax reform and cut all deductions and loopholes and institute a flat tax for everyone. After all, we're in this together .. everyone should pay the same. The more you make the more you pay but it will still be the same percentage as everyone else.

March 30 2013 at 3:45 PM Report abuse +4 rate up rate down Reply