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Panel revises proposed cap on mortgage interest write-off

WASHINGTON—Responding to sharp criticism of its initial proposal to slash the tax deduction for home-mortgage interest, President Bush's tax-restructuring panel offered a revised and final plan Tuesday to increase its proposed cap on the write-off by 25 percent.

But the new level—ranging from $227,147 to $411,704 depending on a region's housing prices—still would be far below the average mortgage in high-price markets such as New York City, Washington, D.C., South Florida and parts of California. The median home price in Santa Clara County in the San Francisco Bay area, for example, was $705,000 in September.

"We may have to downsize," said Anthony Dominguez, 35, a program coordinator with the Santa Clara County Probation Department. He bought a $1.2 million house with a $960,000 mortgage in June in Gilroy, Calif., south of San Francisco. He and his wife consider themselves middle class and were anticipating a large tax deduction for their mortgage interest.

Homeowners now can write off interest on up to $1.1 million in mortgage debt.

The tax panel's mortgage-interest recommendation is the most politically volatile of all its proposals, and one reason it's viewed as a long shot to become law.

Even boosting the proposed cap by 25 percent didn't stop the panel's plan from being criticized by officials ranging from California's state treasurer to leading Democrats in the House of Representatives from San Francisco, Maryland and Illinois. Two Florida representatives with little in common politically, Republican Katherine Harris and Democrat Robert Wexler, joined the National Association of Mortgage Brokers at a news conference Tuesday to blast the proposal as unfair.

The panel's mortgage-interest plans have been under fire since they became public earlier this month. Panel members said they had to cut the mortgage-interest deduction to help make up for the estimated $1.3 trillion in lost federal revenues that would be triggered by the centerpiece of their proposal, eliminating the alternative minimum tax.

That tax was designed to ensure that the rich pay something, but as incomes have risen over the years it increasingly has hit middle-class Americans, forcing them to pay higher taxes.

Panel Chairman Connie Mack, a former Republican senator from Florida, said the same goal of fairness should apply to the mortgage-interest deduction.

"The majority of the benefit from the present treatment of mortgage-interest deduction goes to the very high income," Mack said.

The panel's report notes that fewer than 30 percent of American taxpayers benefit from the mortgage-interest deduction, and fewer than 5 percent of mortgages would be affected by reducing the $1.1 million cap. The panel said current policies raised the question of "whether the tax code encourages overinvestment in housing at the expense of other uses."

The panel proposes to replace the current mortgage-interest deduction—which can range in value depending on a homeowner's tax bracket—with a 15 percent tax credit on mortgage interest that would be available to every taxpayer. The plan would phase in over five years for existing mortgage holders.

The new cap would be linked to Federal Housing Administration mortgage limits set county-by-county each year based on the cost of a "modest" home. Those limits range from $172,632 in low-cost states to $312,895 in the most expensive counties.

The panel originally planned to set its mortgage interest deduction caps at those FHA levels. But criticism over the past two weeks led the panel to adjust those up by 25 percent.

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(Puzzanghera reports for the San Jose Mercury News.)

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(c) 2005, Knight Ridder/Tribune Information Services.

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