Did Mitt Romney Slip On a Banana Peel When It Comes to Second Homes?

Eliminating the mortgage interest deduction for high-rollers could cost Romney in battleground states.

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Mitt Romney caused quite a stir this week when he told fundraisers in tony Palm Beach that he might consider limiting the home mortgage interest deduction on second homes.

"I'm going to probably eliminate for high income people the second home mortgage deduction," reporters overheard the presumptive GOP presidential nominee tell donors at a private fundraiser. "By virtue of doing that, we'll get the same tax revenue, but we'll have lower rates."

The campaign has since retreated from those remarks, playing them off as casual conversation, but others say the issue is no laughing matter.

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"While Romney could probably personally stand to lose a break on his second home (not to mention third, fourth, etc…), the idea is not one that should be casually tossed about," Jason Gold, senior fellow at the Progressive Policy Institute, wrote in a recent post.

Gold concedes Romney isn't the only politician or pundit toying around with the idea of eliminating the mortgage interest deduction. After all, according to some estimates, the deduction costs the budget-strapped government billions of dollars in lost tax revenue each year.

Still, killing the mortgage interest deduction, even just for "high-income people" and their second homes, might not be the budgetary and political win-win Romney is looking for, Gold says.

Why? Part of it has to do with simple geography. States with some of the highest concentrations of second homes are also some of the most contentious battleground states, Gold points out. Michigan, Minnesota, Arizona, Colorado, Florida, North Carolina, and Pennsylvania all have relatively high concentrations of second homes and aren't political shoe-ins for either party.

[Read: The Political Fight Over Principal Reduction.]

Eliminating the mortgage interest deduction for those with second homes in those states might not go over so well, especially when winning a state could (or may) come down to mere hundreds or thousands of votes.

Drilling down even further, the density of second homes also poses a potential issue for advocates of eliminating or reducing the mortgage interest deduction. Second homes tend to be concentrated around lakes, beaches, and ski resorts, and therein lies the rub, Gold says.

"It's not a subsidy that's spread out, it's very concentrated, so we know removing the tax subsidy from a concentrated area would have a negative effect, the question is how much?" Gold says. "Is it a marshmallow or a sledgehammer? There's no way you could remove it and not expect a decline in [home] prices."

A decline in home prices is the last thing many of the markets with high concentrations of second homes need, but the impact would be more than financial. The mortgage interest deduction is virtually "attached" to homeownership, Gold says, and taking away that benefit might undermine the concept that owning a home is worth it.

[Read: Is the Housing Market Bottom in Sight?]

"There's two components: one is the actual numerical component when people sit down and figure out what it means [financially] at the end of the year," he says. "The second is the psychological component. It's just another question of [whether] people discount ownership of housing as worth it if another considerable benefit is taken out from under them."

The Romney campaign has since backed away from the remarks on the mortgage-interest deduction and his campaign says it has no plans to announce new policies or proposals relating to the tax break anytime soon.

"He was just discussing ideas that came up on the campaign trail," said former Sen. Jim Talent of Missouri, a frequent campaign surrogate, earlier this week.

Still, Romney's nonchalant comments provide insight into how he views the nation's housing market situation, Gold says.

"It draws a stark contrast to how the president has approached housing and how Gov. Romney has," he says. "It's just two different approaches and highlights where housing might be a priority in the way they're looking at the economy [as a whole]."

mhandley@usnews.com

Twitter: @mmhandley