Elim­i­nat­ing mort­gage in­ter­est de­duc­tion would be a tough sell

The Reporter (Lansdale, PA) - - OPINION -

If you want to un­der­stand why the tax code is so hard to over­haul, consider the case of the mort­gage in­ter­est de­duc­tion. The is­sue is so sen­si­tive that the House and Se­nate are deal­ing with it in com­pletely op­po­site ways.

To its many de­fend­ers and ben­e­fi­cia­ries, the mort­gage in­ter­est de­duc­tion sym­bol­izes and sub­si­dizes the Amer­i­can Dream. It pro­motes home­own­er­ship, which gives peo­ple a stake in stronger neigh­bor­hoods and safer streets. And, of course, home­own­er­ship is the ticket to the mid­dle class.

By al­low­ing home­own­ers to write off their mort­gage in­ter­est ex­penses — thus re­duc­ing their taxes — the gov­ern­ment pur­port­edly en­cour­ages all these good things. The cost in lost tax rev­enue is con­sid­ered money well spent. In 2017, that would be $64 bil­lion, ac­cord­ing to the Of­fice of Man­age­ment and Bud­get.

Case closed? Not ex­actly. For years, many econ­o­mists have ar­gued that the stan­dard nar­ra­tive about the de­duc­tion is mostly a self-serv­ing fairy tale.

The re­al­ity, they say, is that the sub­sidy pro­motes over­sized homes and higher real-es­tate prices. Up­per-mid­dle-class house­holds are the main users of the de­duc­tion, which barely — if at all — raises the home­own­er­ship rate.

Like the United States, Den­mark has a mort­gage in­ter­est de­duc­tion. In 1987, the Danes re­duced the de­duc­tion’s gen­eros­ity. If the de­duc­tion in­creased home­own­er­ship, a re­duc­tion should have di­min­ished it. That didn’t hap­pen.

The ero­sion of the sub­sidy did have an ef­fect but not on home­own­er­ship. What did de­cline was the size of homes peo­ple bought and the amount of debt they as­sumed.

The same dy­namic ap­plies to the United States, Gru­ber says. For decades, the home­own­er­ship rate has hov­ered around 64 per­cent.

It spurted briefly to nearly 70 per­cent dur­ing the 2000’s hous­ing “bub­ble” but has re­verted to 64 per­cent.

Re­duc­ing or elim­i­nat­ing the de­duc­tion would cause homebuyers to pur­chase smaller homes with less debt — a good thing, Gru­ber says. Peo­ple could use the ex­tra cash to save for re­tire­ment, to pay for chil­dren’s col­lege or to cover daily ex­penses.

You might think that the mort­gage de­duc­tion’s days are num­bered. Per­haps they are, but it seems doubt­ful. The messy re­al­ity is that, re­gard­less of its ac­tual im­pact on the econ­omy and per­sonal hous­ing de­ci­sions, mil­lions of Amer­i­cans be­lieve they ben­e­fit from the de­duc­tion.

Consider that about 34 mil­lion tax­pay­ers take the mort­gage in­ter­est de­duc­tion, ac­cord­ing to the Con­gres­sional Joint Com­mit­tee on Tax­a­tion.

Although that’s only about a fifth of all tax fil­ers, they’re con­cen­trated in the up­per mid­dle class. Roughly three-quar­ters of the rich­est fifth of Amer­i­cans rely on the mort­gage de­duc­tion to cut their taxes. They’re bound to fear its loss will not be com­pen­sated by other tax re­duc­tions.

Fi­nally, there are all the busi­nesses that de­pend on hous­ing: builders, real es­tate agents, mort­gage bro­kers, fur­ni­ture and ap­pli­ance com­pa­nies, to name a few. Although phas­ing out the de­duc­tion would be the best pol­icy — end­ing the hous­ing sub­sidy — the pro­posal be­fore the Se­nate Fi­nance Com­mit­tee would pre­serve the sta­tus quo. In ef­fect: Don’t dis­turb this po­lit­i­cal hor­net’s nest.

Mean­while, the House pro­posal would re­duce the sub­sidy by al­low­ing the in­ter­est de­duc­tion only on loans up to $500,000, a 50 per­cent de­cline from the cur­rent limit of $1 mil­lion.

Just how these op­po­site pro­pos­als can be rec­on­ciled is any­one’s guess. But there is a larger point.

No mat­ter how du­bi­ous or out­moded, tax breaks work them­selves into the na­tion’s eco­nomic and so­cial fab­ric.

They are hard to un­ravel, be­cause peo­ple de­pend on them — and pro­tect them.

Robert Sa­muel­son Colum­nist

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