In the 109 th Congress, tax reform was a major legislative issue. In January 2005, President Bush appointed a nine-member bipartisan panel to study the federal tax code and to propose options to reform the code. Proposals for fundamental tax reform would have changed the tax base from income to consumption or changed the way income is taxed. In a pure consumption tax system, income tax credits and deductions, like the mortgage interest deduction, would be eliminated. Other proposals for tax reform could have simplified the existing income tax system. In these cases, modifications to the mortgage interest deduction could have simplified the tax code. It was unclear whether changes to the mortgage interest deduction would occur given the strength of support that exists for the provision. In 2005, President Bush indicated that homeownership tax incentives are important and should be preserved as tax reform is being considered. Specifically, in the executive order that established the President's Advisory Panel on Federal Tax Reform, one of the very few restrictions was a request that the panel "recognize the importance of homeownership and charity in American society." Some analysts concluded that the Administration's statement indicated its support for preserving the mortgage interest deduction along with all of the other homeownership tax incentives. In one tax journal it was written "in plain English, the mother of all tax subsidies, the mortgage interest deduction, shall remain untouched." There are three principal tax provisions for owner-occupied housing and one implicit tax benefit. The deduction for mortgage interest is the most costly provision, with an estimate of $73.7 billion in revenue loss for FY2007. The exclusion of capital gains on the sales of homes is the second largest tax provision for homeowners, with an estimate of $28.5 billion in tax revenue loss for FY2007. The deduction of state and local real estate taxes is the third provision, with an estimate of $16.8 billion in tax revenue loss for FY2007. The exclusion of net imputed rental income from taxation, which is not a provision in the tax code but exists implicitly, is estimated to cost $33.2 billion in uncollected tax revenue for FY2007. This would bring the total projected revenue cost for owner-occupied housing in FY2007 to $152 billion. The amount of revenue foregone by the federal government to promote homeownership greatly exceeds government spending on housing. Appropriations made in the Department of Housing and Urban Development (HUD) budget totaled $31.5 billion in FY2005. Most of the appropriations for HUD address rental housing problems, most of which are faced by households with very low incomes or other special housing needs. Although fundamental tax reform has not been on the legislative agenda in the 110 th Congress, changes to the mortgage interest deduction have been enacted. The Tax Relief and Health Care Act of 2006 ( P.L. 109-432 ) temporarily allowed, for tax year 2007, mortgage insurance premiums paid for a personal residence to be tax deductible as mortgage interest. The Mortgage Forgiveness Debt Relief Act of 2007 ( H.R. 3648 ; P.L. 110-142 ) extended that temporary provision through the end of 2010. Mortgage insurance, which guarantees loan repayment in case of death or disability of the borrower, is often required by lenders for individuals who do not have sufficient funds for a full down payment on a residence. Premiums paid or accrued for qualified insurance on mortgage loans can be treated as qualified residence interest and deducted from income tax. "Qualified mortgage insurance" is mortgage insurance provided by the Veterans Administration (VA), the Federal Housing Administration (FHA), the Rural Housing Administration (RHA), and private mortgage insurers as defined under Section 2 of the Homeowners Protection Act of 1998 (12 U.S.C. Sec. 4901). The deduction of qualified mortgage insurance premiums generally applies to amounts paid or accrued only during tax years 2007 through 2010, with respect to contracts issued during those years; the provision terminates for premiums paid or accrued after December 31, 2010. This deduction is also subject to a phaseout. For every $1,000, or fraction thereof, by which the taxpayer's adjusted gross income exceeds $100,000, the amount of deductible mortgage insurance premiums is reduced (but not below zero) by 10%. In the case of a married taxpayer filing separately, the amounts are lowered to $500 and $50,000. The purpose of this phaseout is to prevent taxpayers with adjusted gross incomes greater than $109,000 ($54,500 for a married taxpayer filing separately) from claiming this tax benefit. Prepaid mortgage insurance amounts that are allocable to periods beyond the year in which they are paid are attributed to a capital account and treated as paid in the allocable year (contracts issued by the VA or RHA are excluded from this provision). If the mortgage is paid off before the end of its term, a deduction is not allowed for the unamortized balance of the capital account. Several tax reform proposals were introduced, most of which proposed to enact fundamental tax reform by changing the tax base from income to consumption. H.R. 25 , the Fair Tax Act of 2005, and its companion bill, S. 25 , proposed a national sales tax that would have eliminated the current federal income tax system including the mortgage interest deduction. S. 812 , the Flat Tax Act of 2005, proposed to replace the current federal income tax system with a flat rate consumption tax (also known as a modified value-added tax). The flat tax rate would have been 20% of taxable earned income. The bill defined taxable earned income as the excess of earned income (wages, salaries, professional fees) over a standard deduction, a deduction for cash charitable contributions, and a deduction for home mortgage interest. The deductions the bill proposed to allow were consistent with the previously mentioned mandate given by President Bush to the tax reform panel. H.R. 1040 , the Freedom Flat Tax Act, proposed to allow taxpayers to choose an election to be subject to a flat tax, in lieu of the existing income tax. The rate would have been 19% of wages for the first two years after an election was made, and 17% thereafter. The bill proposed to allow a basic standard deduction and an additional standard deduction for each dependent in the household but made no mention of allowing the mortgage interest deduction. S. 1099 , the Tax Simplification Act of 2005, proposed a similar flat tax structure, with a 19% tax rate on wages for the first two years that would then have been reduced to 17% thereafter. The nine-member panel appointed by President Bush produced a report in the fall of 2005 that included a proposal to change the mortgage interest deduction. Specifically, the panel recommended converting the deduction to a tax credit equal to 15% of interest paid on mortgages. The principal amount of debt associated with the interest that could be claimed would have been limited to regional house prices in the range of $227,000 to $412,000. This range would have been based on the house price ceilings that the Federal Housing Administration (FHA) sets for the amount of a home mortgage loan that it will insure. These amounts vary by county across the country. Thus, if the principal amount of a mortgage loan was $500,000, interest on the first $412,00 of loan principal would have qualified, depending on where the house was located. The remainder of this report describes the deduction for home mortgage interest and explores rationales for subsidizing homeowners. The report then provides an economic analysis of the value and performance of the deduction and concludes with a discussion and analysis of the possible changes to the mortgage interest deduction that could occur under different tax reform scenarios. Taxpayers may claim an itemized deduction for payments of "qualified" interest related to a primary or secondary residence. The payments of interest that qualify include home mortgage interest, which is the interest paid on any loans secured by either the taxpayer's main home or a second home. The loans may be a mortgage (first or second), a line of credit, or a home equity product. Qualified residences can include cooperative apartments, condominiums, and mobile homes. Mortgage interest associated with recreational vehicles and boats can be included in the deduction as long as the vehicles have sleeping, cooking, and toilet amenities. The debt must also be collateralized by the vehicles to be eligible for the mortgage interest deduction. Two types of indebtedness are associated with the interest that can be deducted: acquisition and home equity. Acquisition indebtedness is debt incurred in acquiring, constructing, or substantially improving a qualified residence and secured by such residence. Home equity indebtedness is all non-acquisition debt that is secured by a qualified residence. The interest on such debt can be deducted even if the proceeds are used for personal expenditures unrelated to the home. The underlying mortgage loans can represent acquisition indebtedness of up to $1 million, plus home equity indebtedness of up to $100,000. Any secured debt used to refinance home acquisition debt is treated as home acquisition debt, up to a certain point. The new debt qualifies as home acquisition debt only up to the amount of the balance of the old mortgage principal just before the refinancing. Any additional debt is not home acquisition debt, but may qualify as home equity debt. Thus, when refinancing, acquisition debt may not rise and home equity loans may not exceed $100,000. For example, if a homeowner with a $150,000 mortgage refinances the debt for $300,000, the original $150,000 would be considered as acquisition debt, an additional $100,000 would be considered as home equity debt, and the interest on these amounts would be deductible. The interest on the remaining $50,000 of debt would not be deductible. The mortgage interest deduction was not introduced as a provision to subsidize homeownership. It evolved over time as a result of the tax treatment of interest.