Fewer Americans Claiming Mortgage Interest Deduction

Did you know that at one point in time, all interest was tax deductible?  At the time that income taxes were first ratified in 1913, consumer credit was rare to non-existant.  At this time, the vast majority of loans were made for business purposes.  As a result, all interest payments were made tax deductible in order to encourage business activity.  As consumer credit became more prevalent, various tax deductions were slowly stripped away.  In 1986 there was a overhaul of the tax code, and tax deductions for credit cards, car loans, and other consumer loans were phased out.  One significant exception was made: the mortgage interest deduction was left intact.

However, fewer and fewer people are claiming the mortgage interest deduction on their federal income taxes.  According to recent data from the IRS:

“For 2010, [interest deductions decreased] 7.1 percent to $402 billion. Of the $30.7 billion decrease in the interest paid deduction, 97.6 percent was attributable to the mortgage interest deduction. This large decrease in the mortgage interest deduction could be partially attributed to the lower average prevailing interest rates throughout 2010. Other factors that could have affected the mortgage interest deduction included the decrease in home ownership and decrease in home prices.”

According to an article on Bloomberg last week, mortgage interest deductions hit their highest point in 2007, when nearly 41 million people claimed the deduction on their returns.  By 2009 that number fell to 36.5 million people. Not surprisingly, the decline has coincided with a decline in home ownership.  The percentage of Americans owning homes peaked in 2004 at 69.2 percent, and was as low as 65.9 percent in the second quarter of 2011.  Of course this all makes sense – if you lost your house in foreclosure (or sold it because you could no longer afford it), you no longer have a mortgage, and can no longer claim the deduction.

For a long time, the mortgage interest deduction has been seen as a sacred cow of American politics.  There is overwhelming support for it, despite clear evidence that it benefits the relatively wealthy at a much greater rate than lower- and middle-income Americans, not to mention benefits homeowners over renters.  Politicians are loathe to mess with it.

All of this leads to the broader question: should the government support policies that encourage homeownership?  The mortgage interest deduction, the availability of FHA loans, the existence of Fannie and Freddie, as well as a raft of other government policies all support homeownership.  Some of these policies contributed at least in part to the problems that the housing market faces now (they were by no means the primary reasons for the collapse).

Do you think we should be promoting homeownership with the mortgage interest deduction?  Let me know in the comments section below.

About Michael Kraus

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