End the bad policy and perverse incentives created by the Mortgage Interest Deduction subsidy

United States

Taxation

Problem

The Tax Foundation argues that few low- and middle-income taxpayers benefit, calling it subsidization of the real estate industry. Alan Mallach, a senior fellow at the Center for Community Progress and a visiting scholar at the Federal Reserve Bank of Philadelphia, argues that the deduction artificially inflates home prices and is in effect a government subsidy of the real estate industry. Critics in the United States also estimate that it contributes between $70 BILLION and $100 BILLION annually to the budget deficit. Eric Toder, an economist with the Urban Institute, told the committee that the MID does “less to encourage homeownership than encourage affluent homeowners to purchase larger and more expensive homes.” Mark Calabria, an economist and former staff member at NAR now at the Cato Institute, a libertarian think tank, derided mortgage interest deductions as “bad policy,” and a “subsidy for debt, not homeownership.”

Opposition to removing the Mortgage Interest Deduction: The National Association of Realtors strongly opposes eliminating the mortgage interest deduction, claiming, "Housing is the engine that drives the economy, and to even mention reducing the tax benefits of homeownership could endanger property values. Home prices, particularly in high cost areas, could decline 15 percent if recommendations to convert the mortgage interest deduction to a tax credit are implemented." The Tax Foundation, a conservative think tank, claims that economists are basically united in their opposition to the deduction. In regards to the opposition it is possible that housing has become an outsized "engine" to the US economy. This argument by itself does not justify continuing the subsidy on the basis that removing it presents a risk to the economy. This is essentially blackmail by those that are benefiting from the subsidy. It is interesting that the National Association of Realtors stresses that fall of home prices is particularly at risk in "high cost areas". This supports the argument that the subsidy is mostly for wealthy to purchase larger and more expensive homes.

Another argument against the removal for the Mortgage Interest Deduction is that US government support for home ownership benefits society. Currently reviews of this benefit are tenuous at best: (*need references*) -- Claim: The mortgage interest deduction was intended to promote homeownership. Fact: When the federal tax code was introduced in 1913, all interest was deductible. At that time, few Americans except farmers had home mortgages, says Martin Sullivan, a contributing editor with Tax Analysts, a publication for tax professionals. "I'm pretty sure nobody intended it as a subsidy for the great American dream."

In 1986, when Congress overhauled the tax code, it eliminated the interest deduction for most consumer debt including auto loans and credit cards, but kept it for mortgages used to buy, build or substantially improve a home. This exception was a result of "brilliant lobbying" by the housing industries, says University of Southern California real estate Professor Richard Green. In 1987, Congress limited the deduction to interest on up to $1 million in mortgage debt on a first and second home. But it also created the home-equity deduction that lets homeowners deduct interest on up to $100,000 in mortgage debt used for purposes other than buying, building or improving a home. This was a back-door way of letting homeowners (but not renters) once again deduct interest on consumer debt. It's hard to see how the home-equity deduction promotes homeownership, since it subsidizes people who use their houses like piggy banks, thereby depleting their home equity.

Even real estate lobbyists have a hard time defending it, other than to say now is not a good time to be messing with the oh-so-fragile housing market.

Comments

Solution

Phase out the mortgage interest deduction.

We will accept a plan that phases out the mortgage interest deduction, but will continue to execute our actions if the entire mortgage interest deduction is not removed by Jan. 1, 2016.

The law to end the mortgage interest deduction must be completely independent of any other government actions. Any attempt to negotiate the removal on the basis of separate demands will see the expansion of the action to attack those who are seen as holding the solution hostage.

 

Please post you ideas for the best solution for phasing out the mortgage interest deduction in the comments section.

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Redirect 50% of all new tax revenues from the removal of the mortgage interest deduction to increases in tax breaks for energy saving upgrades to house. (e.g. solar panels, new insulation, geothermal heating/cooling) This would incentive small businesses and construction firms that would undertake the boom in housing upgrades. It would also reduce the growth in energy power and infrastructure needed. -- V3ritas Posted At: 2013-09-02 21:53:58 UTC

Facts

Under 26 U.S.C. § 163(h) of the Internal Revenue Code, the United States allows a home mortgage interest deduction, with several limitations. First, the taxpayer must elect to itemize deductions, and the total itemized deductions must exceed the standard deduction (otherwise, itemization would not reduce tax). Second, the deduction is limited to interest on debts secured by a principal residence or a second home. Third, interest is deductible on only the first $1 million of debt used for acquiring, constructing, or substantially improving the residence, ($500,000 if filing separately) or the first $100,000 of home equity debt regardless of the purpose or use of the loan.

On March 9, 2012, PBS aired an episode of its show Need to Know in which a bipartisan panel discussed tax reform. The panel, which consisted of former Democratic politician Eliot Spitzer, tax law professor Dorothy A. Brown, Reagan domestic policy advisor Bruce Bartlett, and libertarian economist Daniel J. Mitchell, unanimously opposed the federal mortgage interest deduction.

 

March 22, 2014:

http://www.marketwatch.com/story/should-congress-limit-mortgage-deduction-2014-03-22

"For households making above $200,000 a year, the average benefit is $1,784 a year in tax savings. For households earning $65,000 a year, the deduction generally yields less than $200 in tax savings"

Comments

Action

Boycott the National Realtors Association. The use of a realtor only supports a housing market that is highly inflated and subject to volatile market swings making your home purchase both over-priced and at a higher risk. Their defense of this subsidy is based on their benefits by selling higher priced homes and receiving a commission. If you are in the market to buy a home look for options to execute the transaction yourself without any help from a realtor. This action section will continue to incorporate updates from the community on how to avoid the National Realtors Association until they stop blocking the removal of the Mortgage Interest Deduction subsidy.

 

Please post any better ideas for Action or ways to boycott the National Realtors Association in the comments section.

Comments

Posted by T.J.

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