A House committee's effort to find new ways of approaching old problems Tuesday reignited a decades-old debate about consolidating county services and ending the state's mortgage interest tax deduction.

"To not look at that, with a large deficit looming, it's almost negligent," said Rep. Paul Marquart, DFL-Dilworth.

Public Strategies Group, an organization that specializes in retooling government, outlined ways that Minnesota could streamline delivery of services, eliminate state aid to counties and remove local levy limits.

But much of the discussion centered on its proposal to do away with the state's residential mortgage interest deduction.

While the state's deduction pales in comparison to the federal mortgage tax break, Minnesotans will write off $1 billion in interest over the next two years that could be going to the state, according to the group's report, which it compiled last year.

Babak Armajani, chairman of Public Strategies, said his group found no proof the deduction spurred home-buying, an original intent of the law, and he said that fewer than one-third of Minnesotans use the deduction because many either don't itemize their taxes or own their home outright.

"But it's something we all hold near and dear, so politically it's a very difficult issue," Armajani said.

If Minnesota did away with the tax break, state officials could direct some portion of the windfall to other housing subsidies, such as down-payment assistance, foreclosure prevention or other budgetary needs, the report said.

A similar measure on deductions passed the Minnesota House last year but not the Senate. This year, there appears to be little support to revisit the legislation.

Rep. Keith Downey, R-Edina, said all the talk about ending tax deductions "masks the fact that we don't have spending under control."

If there was agreement on the committee, it's that the state's tax system, stitched together over the decades, doesn't match well with today's economy. The state's mortgage interest tax deduction, for instance, dates back to 1933.

Five of the state's largest foundations paid for the report in part due to concerns about the state's long-term budget deficit, said Sandra Vargas, president and CEO of the Minneapolis Foundation.

The idea wasn't to revisit old arguments about expenses versus taxes, but to find a better way to match taxpayer money with state goals, she said.

"We need to start a different conversation about how the state is funded," Vargas said. "We need to look at the budget as a whole. What kind of value do we get for the public dollar? What value do we get back?"

Baird Helgeson • 651-222-1288