Trim this de­duc­tion

The ex­ces­sive tax sub­sidy for real es­tate

The Washington Post Sunday - - SUNDAY OPINION -

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.

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