To amend the Internal Revenue Code of 1986 to provide for the establishment of, and the deduction of contributions to, education savings accounts and, in order to compensate for the loss in Federal revenues by reason of such accounts, to restrict the deduction for home mortgage interest.

Amends the Internal Revenue Code to allow an individual income tax deduction for up to $1,000 annually of contributions to a savings account established to pay the educational expenses (tuition, supplies, meals, and lodging) of any individual under age 19 at an institution of higher education or a vocational school. Disallows the deduction for contributions to an account maintained for any individual aged 19 or older. Requires any account balance to be distributed after the beneficiary attains age 27.

Excludes from gross income any account distributions that are used to pay educational expenses of the eligible beneficiary.

Exempts an account from taxation (except for the tax on unrelated business income of a charitable organization) unless a contributor or the beneficiary engages in specified prohibited transactions in connection with it.

Imposes a ten percent surtax on distributions not used for educational purposes.

Requires the account trustee to report to the Secretary of the Treasury and to the account's beneficiary concerning the account. Imposes a penalty for failure to report.

Allows taxpayers who do not otherwise itemize deductions to deduct for contributions to an education savings account.

Imposes penalty taxes in connection with excess contributions or prohibited transactions associated with an account.

Decreases the permissible income tax deduction for qualified residence interest: (1) from $1,000,000 to $50,000 with respect to acquisition indebtedness; and (2) from $100,000 to $75,000 with respect to home equity indebtedness. Disqualifies any mobile home used on a transient basis or any boat as a qualified second residence for purposes of these deductions.