Slash mortgage deductions for the rich? Fat chance

Obama wants to cut mortgage interest deductions for the rich By Tami Luhby, senior writer

NEW YORK (CNNMoney) -- President Obama's plan to limit two popular deductions for wealthy taxpayers will hit a wall of resistance from entrenched special interests.

The president once again proposed in his budget to curtail high-income earners' tax deduction for mortgage interest payments and charitable contributions.

Under his proposal, taxpayers in the 33% and 35% tax brackets would only be able to deduct their contributions and mortgage interest payments at the 28% rate. It would affect those with taxable income of $250,000 and up and bring in $321 billion over 10 years, according to the White House.

The Obama administration, as well as several tax and deficit commissions, have called for limiting or eliminating the deductions in the past. But the proposals have gone nowhere and the same outcome is expected this year.

Still, the real estate industry and non-profit sector are not taking any chances. They are making it clear to both Congress and the White House that they strongly oppose any limits to the deductions.

'An attack on the middle class'

The real estate industry is a powerful advocate for the mortgage interest deduction. And they are a major lobbying force on Capitol Hill.

"We will oppose any limit," said Jerry Howard, chief executive of the National Association of Home Builders. "This is an attack on the middle class."

The industry is concerned that capping the deduction will hurt the housing market, which continues to stumble. The tax break makes homeownership more affordable, they argue.

This is the second time in recent months that the Obama administration has recommended curtailing the deduction, which costs the Treasury Department an estimated $131 billion a year. In December, a presidential debt panel recommended turning the itemized deduction in to a 12% non-refundable tax credit available to everyone. It would also cut the size of eligible mortgages in half to up to $500,000.

"NAR will remain vigilant in opposing any plan that modifies or excludes the deductibility of mortgage interest," National Association of Realtors President Ron Phipps said at the time.

And when the Realtors association speaks, lawmakers listen. The group spent $17.6 million on lobbying in 2010, the 13th highest, according to the Center for Responsive Politics.

In all, the real estate and home building industries spent more than $68 million last year.

Charities feel the pinch

While charities don't have the same spending power on lobbyists, they also plan to make their voices heard.

"We look for every opportunity to help policy makers understand the consequences of different proposals," said Tim Delaney, head of the National Council of Nonprofits, a network of charities.

Limiting the charitable deduction will likely curtail large donations to charities for the arts, environment, education and other sectors, he said. This would come at a tough time for many charities since they are seeing donations drop, while the demand for their services rises.

The 54 most generous donors in America gave only $3.3 billion in 2010, the smallest sum since 2000, according to a ranking compiled by The Chronicle of Philanthropy and Slate magazine.

Charities have tremendous clout, said Ken Berger, chief executive of Charity Navigator, which evaluates non-profits' fiscal operations. And they are very reliant on donations from the wealthy, who like their tax breaks.

"The deduction isn't the sole motivation, but it is significant," Berger said. To top of page

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