Tax deduction for mortgage interest could be on the chopping block

I think Congress won't get rid of the deduction altogether.  What you'll see is a smaller deduction and a complex formula in it's place.  For example you won't be able to deduct based on the home value AND your income.  Also, the tax deduction for second liens (second mortgages will disappear).

In part, the hoary deduction has a target on its back as a result of policymakers rethinking the whole issue of homeownership. In the wake of the havoc that followed the latest housing bust — a calamity that still shadows the U.S. economy and will for years to come — it's no longer so clear that near-universal homeownership should be a paramount goal.

Scholars have long argued that the mortgage deduction and other tax subsidies supporting housing, including a deduction for property taxes and tax exemptions for profits on home sales, are neither equitable nor economically efficient. Some say they've helped skew the economy's reliance on an industry that has little export potential and often encourages over-consumption.

"It's fair to ask whether [government money] is best spent on housing or plants and equipment or other investments," said Richard K. Green, director of the USC Lusk Center for Real Estate.

More important, despite the deduction's grip on the public and politicians, changing it as part of a package of other revisions offers Washington a chance to do something meaningful about the surging federal deficit: generate billions of dollars more in federal revenue that could be used to cut the deficit while inflicting surprisingly little pain on most middle-class homeowners.

 And...

Many experts don't think an elimination of the mortgage deduction will hurt homeownership, though they say it is likely to influence the size of homes people buy — and eventually what builders put up — as well as other personal financial decisions. More people may pay down their mortgages or invest in bonds or stocks if they see less tax benefits to keeping a big home loan.

Analysts point out that other countries, such as Canada and Australia, have high homeownership rates similar to the U.S., currently at 67%, without such housing tax subsidies.

Even so, it won't be easy for policymakers to discard the mortgage interest deduction. It's been around since 1913, having survived Washington's last big tax overhaul in 1986 and subsequent efforts that would have eliminated the provision.

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