Will tax deduction on mortgage interest face chopping block?

(CBS News) CHICAGO - Of all the federal income tax deductions, one has been considered untouchable: the deduction for interest on mortgages. About 40 million Americans take advantage of it and they save an average of $600 a year. Now Washington is looking at it to help heal the budget.

Chicago-area realtor Debbie Scully shudders at the idea that the tax deduction on mortgage interest may be on the congressional carving table.

"Well, it certainly wouldn't be good," she said about what the elimination would do to her business. "Now there's sort of a glimmer of hope that looks like things are stabilizing. Why would they do anything that could hurt that? "

Scully helped Stacy Litow sell her home. "I've always thought that that's one of the incentives to buying," said Litow.

Builders love the tax break, too, because it helps support the market for big homes. The larger the mortgage, the greater the deduction. But it will cost the Treasury nearly $100 billion next year

So now the talk in Washington is about lowering the cap for maximum mortgage you can claim interest from interest down from $1 million.

"If you keep the deduction for the bulk of Americans," said economist Diane Swonk, "but just eliminate it for the over-sized homes, you still get the American Dream."

Affluent owners in expensive areas, especially on the coasts, would see the biggest change.

"If you have the money and you want to spend it, feel free to do that," said Swonk. "But you know I'd much rather see lower tax rates or deductibility for investment in our future, which creates productivity, which creates a higher potential for the future of the economy rather than just big homes."

Now economists who favor lowering the cap on mortgage debt eligible for a deduction from $1 million to $500,000 say it could help reduce the deficit and keep interest rates low. That could help the housing market all by itself.

  • Dean Reynolds

    Dean Reynolds is a CBS News National Correspondent based in Chicago.