Housing Break Limit Likely Revived in Obama Budget

Amid calls for a pullback in government backing for housing, President Barack Obama is expected to re-introduce his bid to limit deductions for high earners -- including the popular mortgage interest deduction.

Obama had proposed cutting itemized deductions for the wealthiest Americans in his last two budgets, a plan likely to re-emerge in the 2012 budget, to be unveiled Feb. 14. Prior efforts to do so has landed with a thud on Capitol Hill, with opposition from Republicans and the real estate industry, among others.

"I think we'll see the same old tricks," said a housing industry source who was not authorized to comment on the record, noting that it would vigourously fight limits.

Earlier proposals limit the value of deductions to no more than 28 percent, which would boost taxes for the top two income brackets, generally those earning more than $200,000.

Critics have held back the idea, in particular arguing it would hamper charitable giving by the rich.

But amid rising concern about budget deficits topping $1 trillion annually, some say the idea could gain new legs.

"We now see a real risk to the mortgage interest deduction," analysts for MF Global wrote in a recent investor note.

Still, they added that any change would have to be part of a broader tax overhaul.

The mortgage interest deduction, highly prized by the middle and upper income classes, is one of the biggest so-called tax expenditures, which critics say inflates home ownership and distorts economic decision making.

Several deficit fighting panels have recommended limiting the deduction.

A debate about overhauling the tax system is just getting started in Congress, with the year likely to be dominated by hearings.

On Friday, the administration laid out three options for revamping the government's role in the housing market.

In its report, the government noted that "tax incentives like the mortgage interest deduction and other tax credits can also encourage investment towards housing over other sectors in the economy."