Elimination of Mortgage, Charitable Deductions May Harm Middle Class

A suggestion by some Democrats that eliminating tax deductions for mortgage interest and charitable contributions could be part of a fiscal cliff deal is raising the specter of significant harm for the middle class, according to some experts.

And they are saying the church is at risk as well.

Some believe that President Obama may support eliminating these deductions despite repeated assertions during his campaign that he plans to protect the middle class.

The Tax Policy Center argues that households earning more than $250,000 (defined as wealthy by the Obama administration) realize an annual tax savings of around $5,460 from taking advantage of their mortgage deduction. Compare that with the approximate $91 annual tax savings for households making less than $40,000 annually. Experts also argue that earners making less than $250,000 per year will get hurt more than low-income earners.

Arnold Ahlert, a former advertising executive turned columnist for Jewish World Review and, sees the conversation about changing the mortgage deduction as just another way to pander to the Democratic base, especially those who don't own homes. He addresses many of those issues in a recent column titled "The Deduction Cap Trap."

"In my opinion, populism is the reason behind all the hubbub. There are lots of people who don't own homes at the lower income level and I think the White House is just trying to take another swipe at the well to do," Ahlert told The Christian Post. "Basically, I think the left is interested in saving their ideology and programs and their willing to take the country down in the process. This simply helps them achieve that goal."

Ahlert, like the Tax Policy Center and others, makes the point that the more wealth a family has, the larger and more expensive the home they will buy, and the bigger the mortgage the bigger their interest deduction will be. Plus, they will spend more on upgrades and maintenance, helping the economy.

The White House Budget Office and Third Way have estimated that capping total deductions at $25,000 would bring in an additional $800 billion of revenue and capping them at $35,000 and exempting charitable contributions would bring in an additional $650 billion.

Moreover, middle-income Christian households who aspire to tithe and give while having to meet the needs of growing or aging families also would bear the brunt of this burden if the law were substantially changed.

Bill Watkins, a CPA and partner at Watkins Uiberall in Memphis, Tenn., advises a number of mid- to high-income clients, many of whom are connected to the housing and real estate industries in some way. He believes if either the mortgage or charitable deductions are reduced or eliminated that it would have a devastating impact on the local and national economy.

"At a minimum, it would probably reduce the number of homeowners in America if either deduction was significantly altered," Watkins told CP. "Plus, it would reduce the number of second homes owned by wealthy individuals. My higher income clients would simply pay cash for either first or second homes but only a relatively small number of people have that option."

Watkins, who also is a board member on the Tennessee Board of Regents, the governing body that oversees many of the state's two- and four-year colleges, also says planned giving and year-end contributions would sustainably decrease.

"If you remove the deductions you lower a person's income. If they have less money, do you think they make year-end contributions to their church or their favorite university? No, because they will need to meet their immediate living needs and the needs of their family. I believe some colleges and charities would close their doors as a result."

In a letter to the president, the Charitable Giving Coalition reported that two-thirds of Americans do not favor cutting, capping or eliminating the charitable tax deduction.

It is estimated that close to one-third of contributions made to churches come in the final weeks of the calendar year. Finance directors and pastors say any reduction in their budgets would severely impact missions and outreach the most.

Dr. Richard Land with the Ethics and Religious Liberty Commission of the Southern Baptist Convention, posted an op-ed in CP earlier this week arguing that any change in the law would be a recipe for disaster.

"By all means we should reduce tax loop holes and extravagant personal deductions," wrote Land. "Our entire federal tax system is irredeemably broken and must be completely transformed. However, charitable deductions are fundamentally different than all other itemized deductions such as mortgage interest."

"Deductions for donations to charity incentivizes giving to others and certainly raises more money for charitable institutions (religious and non-religious) than would otherwise be generated. A recent study revealed that one third of donors would give less if the tax deductibility of charitable giving were to be eliminated. This is particularly true of those most likely to give five and six figure donations, the kind of donations nonprofits call 'sustaining gifts.'"

Land also questions why the Obama administration, with an economy that is still struggling, would want to "weaken and eviscerate" nonprofits of all types that help underprivileged people.

Before World War II, most homes were paid for in cash by those wealthy enough to pay for them. Since the late 1940s, most homeowners have been able to deduct the interest paid from their annual tax bill, a tax policy advantage that many say was one of the foundations of the explosive growth of the middle class.

Most agree that it has boosted homeownership, which benefits millions of individuals and companies who sell goods and services to homeowners.

When the country's most recent recession began in late 2008, the homebuilding and real estate industries took a major hit. In fact, it was so huge that neither industry has come close to the numbers they posted in 2006-2007. Experts also agree the two industries may not see similar numbers for the next several decades, if ever again.

So far, there is not a written plan on the table to eliminate or reduce the mortgage deduction, but that doesn't mean homeowners and businesses impacted by it are not worried.

"Until Congress introduces specific legislation, there's nothing to say about any proposed changes to the mortgage interest deduction," Gary Thomas, president of the National Association of Realtors, told The New York Times in an e-mailed statement. "However, it has always been the N.A.R.'s position that the mortgage interest deduction is vital to the stability of the American housing market and economy, and we will remain vigilant in opposing any future plan that modifies or excludes the deductibility of mortgage interest."

"Doing anything to further chill the housing sector will retard the nascent recovery that we're in right now," said Jerry Howard, chief executive of the National Association of Home Builders.

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