Every so often, I happen across an article about eliminating the mortgage tax deduction. The frequency of these articles has increased rapidly as those with little understanding of economics or history who were elected to our legislature seem determined to impose austerity on the country (curiously many of these same politicians who railed against debt and spending during the election also voted for an unfunded tax cut that some estimate could increase the deficit by $700-800 billion. But I digress).
Anyway, there was an article by Don Lee in the Los Angeles Times today that discusses the possibility of eliminating the mortgage tax deduction.
There are some interesting factoids in the article, especially regarding the fairness of the tax deduction. According to the article, Americans saved $85.5 billion in taxes as a result of the mortgage tax deduction. Of this, 75 percent of the savings goes to people who make $100,000 or more. Additionally, half of all homeowners, and only about 25 percent of taxpayers benefit from the deduction. The tax deduction also disproportionately benefits those who live in more expensive homes.
The article says that “it’s no longer so clear that near-universal homeownership should be a paramount goal”. It is worth noting that the mortgage interest deduction originally had nothing to do with promoting homeownership. Rather, it is an artifact from a time when ALL interest was deductible. Interest payments were generally considered business expenses at a time when homeownership was much less widespread than it is now (and most homes were owned outright), and income from rents generated lots of revenues (for more on the history of the mortgage interest deduction, this blog post by Barry Ritholtz is a good read).
The National Association of Realtors has already started a pre-emptive campaign in support of the mortgage tax deduction, saying that home values would fall about 15 percent if the deduction was eliminated.
Honestly, I think this whole debate is kind of moot. I personally can’t fathom a repeal of the mortgage interest deduction. Not because I have an overwhleming affinity for it, but because I don’t think there is a politician in America who would like to alienate nearly every homeowner in their district. This position would be politically suicidal, and in my experience, remaining in office is of the utmost concern to most politicians. The only way I can see the tax deduction rolled back would be if it was done gradually, over time, at some point in the distant future that would not affect any current homeowners or voters.
What do you think? Can you envision a scenario where the mortgage interest deduction is repealed? Let me know in the comments section below.
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B in NC
December 20, 2010 @ 7:21 pm
I would love to see this deduction, along with all other deductions like child deductions, removed/deleted from the tax code and lower the lowest tax rate. Why should a 30 year old father of two who owns a home makiing $50,000/year pay less taxes than a 30 year male without kids making that same $50,000 and chooses to live in an apartment so he can easily move/relocate to advance his career. It makes no sense whatsoever. Eliminate all deductions and let the tax rate start at 5% instead of 10% or raise the 10% bracket (along with all the others) up incremently.
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Gina Pogol
December 20, 2010 @ 7:51 pm
My understanding is that the mortgage interest deduction does little to promote home ownership. An analysis of home ownership rates in this country and others shows little difference between countries that subsidize home ownership and those that don’t. In addition, those who benefit most (folks who itemize deductions and buy expensive homes) would probably buy homes anyway even if the deduction did not exist. That said, I’d hate to see housing destabilized any more right now. The only way I see anyone summoning the political will to get this done is if we manage to get term limits passed first.
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Russ
December 20, 2010 @ 8:15 pm
Sure, this will happen when the tax code is repealed and we get a flat tax. I wish the Times would pull their head out and stop with the articles that scare people for no logical reason. Sheesh.
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