Hat tip to daytrip for sending this in from the latimes.com:
Would you support a tax reform measure that could help reduce the federal deficit, remove a needless distortion in the economy and make the system fairer?
Me too, which is why I’m taking aim at a sacred cow: the home mortgage interest deduction. That’s right, the mortgage interest deduction that every homeowner, including me, loves.
If you listen to home builders and real estate agents, they’ll tell you that the mortgage interest deduction is what makes homeownership possible for millions of Americans.
Yet last year, homeownership in the United States, battered by mortgage foreclosures, sank to 65%, a 17-year low, while next door in Canada, where taxpayers don’t get a deduction for mortgage interest, homeownership continues to rise, reaching more than 69% last year, according to Toronto’s Financial Post.
The reason is that our mortgage interest deduction doesn’t directly support homeownership; instead, it supports mortgage indebtedness, which isn’t the same thing at all.
If the goal is really to increase homeownership, a better idea might be to offer a tax break aimed more precisely at middle-income families buying starter houses — a tax rebate for interest on the first $200,000 in mortgage debt, for example.
But that’s not how the mortgage deduction works. First, it’s only useful to people who itemize deductions, which only about 30% of taxpayers do. Second, it helps people with big mortgages more than those with small ones. Third, like all deductions, it helps people with the highest incomes (who get the equivalent of 39.6% of their mortgage interest knocked off their tax bill in the top bracket) more than people with lower incomes (who get 25% or less off if they itemize). Moreover, if someone buys a vacation home, that mortgage interest is deductible too, as long as the total debt is under $1 million.
But don’t take it from me. Take it from the economists at the Mercatus Center, a mostly conservative think tank at Virginia’s George Mason University.
“Most taxpayers do not benefit from this deduction at all or receive a very small benefit,” they wrote in a report issued last month. “The only taxpayers who do receive a large benefit are those in the upper income brackets…. Its primary effect is to encourage Americans who would have already been able to afford a house to take on even more debt.
“Recent empirical research suggests that the mortgage interest deduction increases the size of homes purchased but not the overall rate of homeownership,” they wrote.
And it’s not just conservatives: Policy wonks in both political parties believe that trimming the mortgage interest deduction is a good idea.
President Obama has proposed limiting the value of tax deductions for upper-income taxpayers to 28%, even if they’re paying a higher tax rate. But that idea hasn’t caught fire.
Mitt Romney, last year’s Republican presidential candidate, proposed eliminating all tax deductions for very-high-income taxpayers and putting a cap on deductions — $17,000, for example — for the rest of us. (He wanted lower tax rates too.)
The co-chairmen of Obama’s bipartisan debt commission, Alan Simpson and Erskine Bowles, offered a more homeowner-friendly proposal: a 12% tax credit that would go to all taxpayers, even low-income families, on mortgages up to $500,000. (A credit directly reduces your taxes; a deduction merely reduces the amount of your income that’s taxed.)
But wait, you and your real estate agent will say. Won’t a change in the mortgage interest deduction knock a hole in home values?
Yes — at least at the high end, where high-bracket taxpayers take on million-dollar mortgages. At the lower end, where modest homes are bought by people of modest means? No effect on prices at all, economists say.
And even at the high end, the Mercatus report found, “it is likely to have little effect.”
You can be sure that home builders and Realtors, whose businesses thrive on big houses and high prices, will push back hard against any proposal for change.
“We’ve been preparing for this debate for a year and a half,” Jim Tobin, chief lobbyist at the National Assn. of Home Builders, told me recently. “The housing industry is just coming out of its depression,” he argued. “This is not the time to dampen that recovery.”
OK; not this month, then. But by the end of the year, the economy, and the housing industry, are likely to be in better shape.
The mortgage interest deduction subsidizes big houses and bigger mortgages, but that’s not a good use of tax dollars. Its benefits flow disproportionately to the wealthy and do nothing for the working poor.
The deduction currently costs the Treasury about $100 billion a year. That’s money we could use to lower taxes, shrink the deficit or pay for Medicare — a debate Obama and the Republicans will surely have.
There aren’t many policy changes that would increase government revenue, remove distortion from the economy and make the distribution of income fairer all at the same time.
Fellow homeowners, let’s take this one for the team.
> If the goal is really to increase homeownership, a
> better idea might be to offer a tax break aimed more
> precisely at middle-income families buying starter
> houses …
In our current system, the primary method for ‘growth’ is borrowing, so sustained economic growth requires sustained net increases in debt load. (The government -by way of deficit spending- has been referred as the ‘borrower of last resort’ more than once.)
Morgtages are the largest debt that most people can assume (at relatively low interest rates, no less) and -unlike the money that financiers borrow- mortgage money readily finds its way to ‘main street’.
In the unlikely event that someone gets the political capital and intent to push through something to clean up the MID, it would make more sense to restructure it so that it’s not so regressive. From that perspective, the proposal to change it into a credit makes a lot of sense. (Though that is true of any deduction.)
Opinion on MIDs basically depend on below status :
a) Before Buying the home
b) OR After i am done paying my Mortgage debt.
Its pretty unfair( new normal) to change the rules in between the game. I would encourage, removing MID for any new home purchases. That is close to fair..
Inquiring minds , would like to know if JIM is in a) or b) :).
I can live with cancelling MID outright today – it is probably a lower-than-imagined benefit with these rates.
But I like both ideas here, either to re-structure or apply any change to newcomers.
It is like the post office cancelling their Saturday deliveries. It is a small contribution that diverts attention from the bigger problems.
I would add a third factor where you live. If you live in small town Indiana, the median house price is about 80k (also true in Fort Wayne,In which is a town of 200k). If you assume 70k mortgage its about 2800 a year in interest. Which is not going to get one above the 11900 standard deduction for married without a lot of other taxes and contributions. So for what coastal folks call fly over country the MID has basically been abolished by the Fed in many places. I am surprised the red state folks don’t champion abolishing the MID as it is really a blue state subsidy.
Kill it outright and do it now.
I say kill it so that I don’t have to listen to another fool tell me that I should buy house to take advantage of the tax write off.
> I am surprised the red state folks don’t champion
> abolishing the MID as it is really a blue state subsidy.
Quick, explain the MID and why it’s unfair in 30 seconds or less. Not that the GOP usually appeals to reason in the first place.
Eliminating the MID is -effectively- increasing taxes. (If you like, you can think of it as Prop 13 writ small.) As far as the GOP is concerned, the fact that the MID is regressive is probably a bonus.
Yes, more sage advice from “economists” that have continually brought us to the brink of economic disaster. We should tax economists on every prognostication they make that is wrong.
I also find it amusing that one of the posters above doesn’t own a house and he’s all for removing the deduction. Self serving much? Maybe we should be charging municipal fees that non-homeowners must pay for schools, police, fire, roads, parks, etc., instead. Yeah. Right.
Tell my 20 something year old daughter that the MID is for “rich people” and she’ll fiercely argue how wrong you are.
She makes in the upper $80’s (not rich). Owns a $400K house (not a mansion). Has a $230K mortgage (40 some percent equity) and the impact in federal taxes alone for her is to either pay $300 or get back $5,400 as a result of her MID and property taxes ($3,600 per year). This is money she plows back into the economy in the form of spending at local businesses. As her income increases, the benefit to her will be reduced. Not congruent with the word “regressive”.
In addition, the person in Indiana has the option of taking the standard deduction or itemizing. Even my son in Texas ($110K house / $40K income) sees a benefit from itemizing and declaring the MID and property tax. He isn’t rich either. The MID makes owning a home possible for him. (He a few rescue dogs as a hobby so he’s not the ideal apartment dweller).
If you want to impact the federal deficit, eliminate the loopholes for ethanol (failed policy from the 1980’s. Who’s the genius that though burning food was a good idea beyond the agri lobbyists?), farm subsidies payable to corporate farms, and eliminate other types of corporate welfare. Abolish the pharmaceutical monopolies so that a pill that costs $.50 in Mexico doesn’t cost $5.00 in the U.S., thereby reducing the costs of Medicare. Cut the welfare fraud (welfare vacations on a WIC card anyone?).
Lay off the middle class. They can’t tolerate much more.
Sorry, I’m not taking one for the the team. The team does not need one more dime of revenue. The team needs to stop pissing all the money they have now down a rathole.
The mortgage interest deduction saves me at least $4,000 a year. That’s a hefty chunk of change to us retired folks. I can’t afford to sell because like a lot of other baby boomers that traded up under the old basis rollover rules, I have a horrendous capital gain problem if I sell. That and the 3.8 percent whatever it’s really for tax. So guess what, team. I will convert this house to a rental, continue to deduct the mortgage interest as a business expense, and my heirs can enjoy the stepped up basis after I pass on.
Quick, explain the MID and why it’s unfair in 30 seconds or less.
It’s a subsidy to the one percent at the expense of the 99. That’s not me talking, that’s the Democrats.