WASHINGTON -- Designed to boost homeownership, the mortgage interest deduction is one of the most popular provisions of the tax code. But Internal Revenue Service data show that only a quarter of tax filers claim it.
The use of the deduction varies widely from region to region, ranging from a high of 37% of taxpayers in Maryland to a low of 15% in North Dakota and West Virginia, according to a USA TODAY analysis of IRS data.
As Congress and President Obama look for a deal to avert self-imposed austerity measures known as the "fiscal cliff," mortgage interest deductions are part of a menu of policy changes that could close the gap between what the government spends and what it takes in. That's in part because the mortgage deduction comes at a significant price tag to the federal treasury: $108 billion a year.
IRS data underscore the uneven benefit of the mortgage interest deduction, which is popular in high-cost areas but rarely claimed in areas with low housing costs. That's because the deduction is available only to those who itemize deductions. And the numbers work only for taxpayers whose total deductions - for mortgage interest, charitable giving and other expenses - are worth more than the standard deduction.
In states with high costs of housing - California, Hawaii, Washington, Virginia, Maryland and Nevada - the average deduction is more than $12,000 a year per taxpayer, easily surpassing the standard deduction ($11,900 for a married couple filing jointly for 2012) even before charitable contributions and other deductions.
Industry groups are lobbying heavily to keep the deduction untouched and cite its broad public support. The National Association of Home Builders conducted a public poll showing 73% opposed to any changes in the deduction. A survey of home buyers by the California Association of Realtors this year found that 79% of buyers said the mortgage interest deduction was "extremely important" to their decision to buy a home - even though IRS data show only 27% of California taxpayers claim the credit.
Taxpayers such as Keri Peckham.
Peckham, 34, a marketing director for an economic consulting company, lives in a three-bedroom house in San Diego with her husband and two small children. They paid $529,000 for their first home two years ago - a price they could afford in part because of the tax benefits. Before that, they were renters in a similar house in the same neighborhood.
"All this criticism I've read that the mortgage interest deduction is just for rich people and all that - we're solidly middle class," she said. "I have an 8-year-old car that's a GMC Yukon. My husband drives a Toyota Camry. We hardly live extravagantly."
IRS data show that homeowners making $100,000 or more claim almost half of the mortgage interest deducted. (They also pay 73% of all income taxes.) Homeowners making less than $50,000 claim 8% of the deductions.
Lawmakers have long taken for granted that the mortgage interest deduction makes good policy. By encouraging homeownership, families can build wealth. And homeowners are more likely to take care of their property, get involved in the community and vote.
A growing number of experts are starting to question whether the deduction is the best tool for encouraging ownership.
"It does not subsidize homeownership. It does something else," said Andrew Hansen, an associate professor of economics at Marquette University. "It's more valuable for people at the upper ends of the income distribution. They're not at the margin between renting and buying. They're between buying something and buying something bigger."
Homeowners and the broader housing market have come to rely on it. Even a homeowner who doesn't take the deduction may someday want to sell to someone who does, and the deduction increases the amount the next buyer may be willing to pay.
"This is going to have an impact on the real estate market, especially as we're just coming out of a recession. It's a particularly bad time to bloody the nose of the home industry again," said Mark Feinroth, a lobbyist for the Maryland Association of Realtors. He helped beat back a proposal last year by Maryland Gov. Martin O'Malley, a Democrat, to cap deductions on state taxes.
Maryland enjoys a homeownership rate higher than the national average, and the average sale price of homes in the Maryland suburbs of Washington - though battered in recent years - can approach $500,000.
"It affects everybody, even renters who aspire one day to homeownership. It's going to affect the value of neighborhoods, and it's going to affect prosperity. It filters down," Feinroth said.