Trim this deduction
The excessive tax subsidy for real estate
THE TAX DEDUCTION for mortgage interest conferred $104.5 billion on homeowners in fiscal 2011. So the deficit reduction commission chaired by former senator Alan Simpson and former White House chief of staff Erskine Bowles focused on this gargantuan tax expenditure, proposing to convert it into a 12 percent tax credit and make it applicable only to principal-residence mortgages of $500,000 or less, not $1 million as currently allowed. There would be no more tax benefits for second homes and home equity loans up to $100,000.
Moderate as this proposal is, the real estate industry has risen up to squelch it. The National Association of Realtors, for example, has launched an ad campaign and a grass-roots lobbying effort, instructing members to tell Congress that “even talk of changing MID [mortgage interest deduction] harms an already fragile market.” The Realtors are circulating scary figures about the hit that homeowners would take if Congress eliminated not only the mortgage interest deduction— which the commission did not actually propose— but also the deduction for real estate taxes.
As the saying goes, there’s real estate in every congressional district. So members of Congress are going to need a lot of courage, and accurate information, to resist such special pleading. The truth is, under the commission’s plan, any harm to homeowners would be partly offset by a substantial reduction in marginal tax rates. More to the point, the deduction does not significantly increase the nation’s rate of homeownership. Rather, it confers a windfall — in the form of cheaper debt and inflated home values— on upper-income households that can afford to buy rather than rent. The vast majority of people who itemize deductions are in the upper brackets, as are those who own second homes and borrow large amounts from home equity lines of credit.
The latest research to confirm these effects comes from economists Christian Hilber of the London School of Economics and Tracy Turner of Kansas State. They found that, on average, the mortgage interest deduction “ has no discernible impact on U.S. homeownership outcomes.” In areas with relatively limited land to build on, it actually decreases homeownership, mainly by raising the value of existing homes and pricing low-and moderate-income buyers out of the market. Elsewhere, it boosts homeownership a bit, but only among higher-income households — at a subsidy rate of $53,590 per additional home purchase.
If the real estate industry really had its own long-term interest at heart, not to mention the country’s, it would support a reduced deduction, because the ultimate effect of unsustainable deficits will be interest rates so high that no one can buy a house. Perhaps the housing lobby should calm down and consider that for a moment.