Erskine Bowles, left, accompanied by former Wyoming Sen. Alan Simpson, co-chairmen of President Barack Obama's bipartisan deficit commission

In response to public concern over the escalating Federal budgets, President Obama formed a bipartisan deficit commission to take a hard look at the nation’s fiscal future. Chaired by former Clinton White House chief of staff Erskine Bowles and retired Republican Senator Alan Simpson from the State of Wyoming, the commission has unveiled a controversial plan that will deeply impact Dublin and the rest of the country. The bold plan calls for reducing Medicare and Social Security payments, significantly cutting the Federal workforce, lowering Federal income tax rates, and eliminating the home mortgage interest expense tax deduction for owner-occupants. Landlords could still deduct their interest expense on rental properties.

Clearly, eliminating the deductibility of home mortgage interest payments would increase tax revenues for the Federal government and reduce our deficit; however, this change could have an adverse fiscal impact at the state and local levels.

The twist with home prices is that they are based not on the “value” of the property; rather, home prices are determined in part by the size of the mortgage and tax payment buyers can afford. With the elimination of the mortgage-interest deduction, many properties can suddenly become out of reach for buyers at their current prices. The National Association of Realtors strongly opposes the proposal to eliminate mortgage interest deduction. “Housing is the engine that drives the economy, and to even mention reducing the tax benefits of homeownership could endanger property values. Home prices, particularly in high cost areas, could decline 15 percent if recommendations to convert the mortgage interest deduction to a tax credit are implemented,” claims the National Association of Realtors.

The drop in home prices would not happen overnight. If Congress and President Obama are to eliminate the deduction in 2015, assuming all other economic variables remain constant, home prices should float down like a feather until they drop by 15% and approach a new price that both buyers and sellers can accept without the mortgage interest tax deduction.

Still, most prospective home buyers would see this drop not as a feather but as a falling knife and stay on the sidelines. Their reluctance to buy would in turn hurt home builders, Realtors, mortgage brokers, and construction workers. Dublin and the rest of the Tri-Valley would continue to struggle with the loss of development fees and flatlining property tax rolls.

A 20-30% drop in home prices may also cause the assessed values on property tax bills to decrease and, in turn, lead to a reduction in the amount of property taxes collected. Unlike many other states, California has a cap on the ad valorem property tax rate with the passage of Proposition 13 in 1978. As a result, the State of California will be forced to cut funding for school districts, counties, and cities further. These impacted local agencies would then be compelled to put more parcel taxes and utility taxes on the ballot and create additional “fees” for services that taxpayers have already paid for through property and sales taxes.

While the Federal tax deduction for mortgage interest would be taken away for home owners, rental property owners may continue to claim the deduction. In addition, many prospective home buyers may opt to delay their purchases until home prices fall to a “new normal” level. In the long run, the home ownership rate is expected to remain at just below 70% as seen in countries that do not offer a mortgage interest tax deduction. Countries like Canada still have home ownership rates close to the United States even though they do not offer home owners a mortgage interest tax deduction.