SALEM -- Lawmakers are looking to trim the popular mortgage interest deduction that gives more than a half-million Oregon households a break on their state income taxes.

Faced with a $1.6 billion budget shortfall, they may deny the deduction to all high-income households and divert the resulting revenue -- likely totaling hundreds of millions of dollars a year -- to affordable housing.

Oregon's mortgage interest deduction is the state's largest housing subsidy, according to state economists, accounting for nearly $500 million in tax breaks each year. Sixty-one percent of the savings goes to earners in the highest income tax bracket: those with gross incomes above $84,000 a year.

House Bill 2006, which had its initial hearing Thursday, would cap the state mortgage interest deduction at $15,000 and eliminate it altogether for homeowners earning over $100,000 a year or $200,000 if filing jointly. Mortgages for second homes and vacation rentals would be ineligible for the deduction. Rules for the federal mortgage interest deduction would not change.

New revenue realized through the legislation would be funneled into three state programs that help low income Oregonians buy homes and aid developers in building affordable housing units.

The bill was sponsored anonymously by the House Committee on Human Services and Housing. The committee chairwoman, Rep. Alissa Keny-Guyer, D-Portland, said she would have put her name on the bill, but it was requested as an anonymous committee bill by lobbyists for the Oregon Housing Alliance, which advocates for greater funding to affordable housing programs.

House Committee on Human Services and Housing chairwoman Rep. Alissa Keny-Guyer, D-Portland, listens to testimony on Thursday, March 9, 2017 at the Oregon State Capitol.

Realtors and homebuilders are rankled by the idea of scaling back the mortgage interest deduction, whereas left-leaning groups tend to support it.

Oregon is in the throes of a housing availability and affordability crisis, but cutting the mortgage interest deduction isn't the way to solve it, Oregon Home Builders Association lobbyist Jon Chandler told lawmakers Thursday.

"We are attempting to address the housing crisis by making it harder to buy and build housing," he said. "That makes no sense."

Oregon Association of Realtors lobbyist Shaun Jillions argued against House Bill 2006 on procedural grounds. Any bill to raise revenue must pass with at least three-fifths approval. Since Democrats don't have that many votes, revenue bills need bipartisan support. But proponents of House Bill 2006 say it's a bill to do away with a tax cut -- not raise revenue -- so it can be passed with a simple majority vote and no Republican support.

Jillions called that into question, telling lawmakers, "I think we would have a pretty compelling case that the bill absolutely intends to raise revenue."

Most who appeared before lawmakers Thursday testified in support of the bill. They argued that higher-income Oregonians don't need another tax break.

Juan Carlos Ordonez, of the left-leaning Oregon Center for Public Policy, said the mortgage interest deduction is a "very costly" subsidy that doesn't help people buy homes.

"The reason is simple -- most of the tax benefits are going to those who do not need help affording a home," he said.

Lawmakers have tried two other times in recent years to scale back the mortgage interest deduction. Those efforts failed.

-- Gordon R. Friedman

GFriedman@Oregonian.com; 503-221-8209