NEW YORK (CNNMoney.com) -- Don't even think of touching the mortgage interest tax deduction in the midst of a fragile housing market.
That was the immediate response of the housing industry, which has come out with guns blazing against the presidential deficit commission's proposal to overhaul the coveted tax provision.
"We will fight this proposal," said Joe Stanton, chief lobbyist for the National Association of Home Builders. "From everything we've read, it will end up being a tax hike."
Charged with finding ways to reduce the nation's exploding federal debt, the bipartisan debt panel recommended Wednesday a wide range of controversial spending cuts and tax changes that would slash $4 trillion in deficits over the next 10 years.
Among the proposals was a major change to the mortgage interest deduction, which costs the Treasury Department an estimated $131 billion a year.
Currently, taxpayers who itemize their deductions can deduct the interest on mortgages of up to $1 million for their principal and second residences, plus on home equity loans of up to $100,000. The provision generally benefits higher-income Americans since they are more likely to itemize.
The panel recommends turning the deduction into a 12% non-refundable tax credit available to everyone. The mortgage size would be capped at $500,000. Interest on mortgages for second homes and on home equity loans would not be eligible.
That did not sit well with the trade associations for the real estate and home building industries, which have contributed a total of $51.2 million to Congress for 2010, according to the Center for Responsive Politics.
"It would immediately stop in its tracks any stabilization we are seeing in the housing market and would effectively increase the cost of homeownership for millions upon millions of people," said Michael Berman, chairman of the Mortgage Bankers Association.
Under the panel's proposal, a homeowner in the 25% income tax bracket would get a credit worth less than half the amount of the deduction, according to the home builders association.
The industry groups argue that the deduction makes owning a house more affordable. A recent study commissioned by the National Association of Realtors showed that nearly three-quarters of homeowners said the deduction was extremely or very important to them.
"Any changes to the [deduction] now or in the future could critically erode home prices and the value of homes by as much as 15%," said Ron Phipps, president of the Realtors' group.
Not everyone agrees, however.
Researchers have found that the deduction does not promote homeownership, according to a report by the Urban Institute, Tax Policy Center and What Works Collaborative. That's because the tax provision's main beneficiaries are not individuals on the margin between renting and owning. Wealthier taxpayers are likely to own homes regardless of the deduction.
The mortgage interest deduction has been the target of previous presidential commissions. In 2005, a panel appointed by then-President Bush recommended allowing homeowners to claim a mortgage interest credit of 15% on loans of up to about $412,000. The proposal went nowhere.
In the end, the trade associations may be able to hold their fire. The commission's recommendations may not even garner enough support among its 18 members to make official recommendations to Congress. The report itself said its aim is to offer a "starting point for a serious national conversation."
Netflix told the FCC that its speed on the Comcast network became so slow that customers began dropping their service. More
The Coolest Cooler is the most successful Kickstarter campaign in the site's history, raising $13.3 million from over 62,000 backers. More
Five CNNMoney readers share stories about saving that you can learn from: What they would do differently if they had another chance. More