Loss could imperil real estate, economy

Bradley Willcox, an internist at the Queen’s Medical Center, was looking for a larger house to accommodate his expanding family when he bought a $1.1 million home in lower Maunalani Heights about a year ago.

Being able to deduct his monthly mortgage interest helped him afford the 3,500-square-foot home.

Now the deduction could be in jeopardy as Washington looks to raise revenue and cut the federal budget deficit before a Dec. 31 deadline known as the "fiscal cliff."

"I’m a physician and it’s still very important to me," Willcox said. "If you look at what I save on taxes in a year, the mortgage interest deduction works out to about $1,000 a month."

Taking away or reducing the mortgage interest deduction, among many options being considered, would hurt homeownership and the real estate industry in Hawaii, according to Hawaii’s congressional delegation and several industry experts.

"We would be greatly affected by the elimination of the interest deductions," said Joe Paikai, president of the Honolulu Board of Realtors.

A household earning $100,000 a year with an outstanding mortgage of $500,000 at a 4 percent interest rate would have to pay $5,180 more in taxes a year, or $432 a month, if the deduction is eliminated, according to Bob Thue, owner and president of Honolulu-based Aloha Tax Service. Thue estimates that more than two-thirds of the returns he prepares include home mortgage interest deductions.

Homeownership in Hawaii is already among the lowest in the nation at just 57 percent, and losing the mortgage deduction could push it even further beyond the reach of many residents, said Dennis Oshiro, executive director of the Hawaii HomeOwnership Center.

That’s one reason Hawaii’s Washington delegation is unanimous in its opposition to eliminating the mortgage deduction.

"We need to leave it in place," U.S. Sen. Daniel Inouye said in an email from his spokesman. "The deduction helps the real estate industry and the building industry, but most importantly it helps many more people realize the dream of homeownership."

Of course, every deduction will have a constituency fighting to retain it. If Washington is to make progress on reducing the deficit, lawmakers have to look at all options, said Hawaii-based economist Paul Brewbaker, principal of TZ Economics.

The mortgage interest deduction costs the U.S. Treasury about $100 billion a year.

"My stance is that everything should be on the table," Brewbaker said. "Index Social Security benefits to price inflation instead of wage inflation; phase out the mortgage interest deduction by 2020; treat the taxability of all pension incomes equally, including Social Security benefits; reduce across-the-board adjustment for federal (Department of Defense) civilian employee pay, for other federal civilian employees and cap increases in military basic pay; increase fees for aviation security; match federal highway funding to highway revenues. Last, but not least, allow the temporary Bush tax cuts to expire.

"It’s all there in the menu for Congress to choose from," Brewbaker said. "Think of it as a Sunday buffet, and you are going to try every dish."

That’s not the opinion of U.S. Rep. Colleen Hanabusa, who said eliminating the deduction would further depress Hawaii’s housing market and threaten the state’s economic recovery.

"We should preserve it, and not bargain it away in response to the fiscal cliff," she said. "The deduction is often a critical factor in determining whether a family can afford to own a home, and eliminating it would reduce housing purchases. I think the proposal to eliminate the mortgage interest deduction is a slap to the middle class."

Surprisingly, only 23 percent of all Hawaii tax filers took the mortgage interest deduction on their 2010 taxes, according to the Washington, D.C.-based Tax Foundation. That puts Hawaii below the national average of 26 percent.

Retiring U.S. Sen. Daniel Akaka said he wants the mortgage deduction to remain, with reforms that make it more tailored to middle- and lower-income residents. He favors eliminating the deduction for wealthier homeowners.

"We need shared sacrifice to reduce our deficit, and right now much of the cost of this program (the mortgage deduction) comes from deductions taken by the wealthiest Americans, so I would support reforms to ensure that it primarily benefits those who need it most," Akaka said.

U.S. Rep. Mazie Hirono, who will be replacing Akaka as the state’s junior senator in January, said she supports the mortgage interest deduction but that it’s only one of many issues to be sorted out.

"Ultimately, I will be evaluating any proposed agreement as a whole based on whether it’s a balanced package that benefits Hawaii’s families and businesses," she said.

President Barack Obama’s Deficit Commission has proposed capping the limit on mortgage principal eligible for a deduction at $500,000 instead of the current $1 million, eliminating the interest deduction on second homes, and turning the deduction into a tax credit capped at 12 percent of interest paid. Obama, however, hasn’t embraced those reforms and is mostly focused on capping the amount of deductions that high-income people can claim across the board. Obama has been seeking higher tax rates on household income over $250,000 as part of the fiscal cliff negotiations.

Lowell Kalapa, president of the Tax Foundation of Hawaii, said eliminating the federal mortgage interest deduction would be a "double whammy" since the state typically adheres to federal law, which means Hawaii taxpayers could lose the deduction on their state income tax as well.

"This being a time when we’re trying to restart the housing industry nationally, this would be a blow to that recovery because it takes away one of the incentives to buy a house," he said.

Willcox, the Queen’s doctor who recently moved to a larger home, would not be pleased if he loses the mortgage deduction.

"The deduction basically paid for one of my children’s educations in preschool (over the past year)," Willcox said. "Without that deduction, it’s hard living in Hawaii."