Will We Lose the Mortgage Interest Deduction?
As lawmakers search ways to reduce the deficit, the mortgage interest deduction keeps surfacing as one way to increase revenue; and many are asking: Will we lose the mortgage interest deduction? Homebuilders and real estate agents tell us that the deduction is necessary to maintaining the stability of the housing market. But is that true or are their statements made out of self-interest?
Will we lose the mortgage interest deduction, and if we do, will it affect our taxes? Will our homes be worth less, and will it be more difficult to sell them? These and other questions have caused the majority of Americans to support keeping the deduction. A recent survey conducted by the NAHB indicated that almost 80% support maintaining tax incentives to promote homeownership. And even a majority of renters, whose taxes subsidize their home-owning neighbors, and who receive no benefit from the interest deduction, oppose its elimination.
However, I believe that much of the support for the program stems from a lack of understanding of both its cost and impact. The deduction seems to have outlived its usefulness; and, in fact, never provided the benefits that most believe. And a fact that many ignore is that the deduction is only beneficial to those who itemize their tax returns, currently about one-third of tax filers. For the other two-thirds, the program is meaningless. Of those who were eligible in 2008, about 25% claimed the deduction, most of whom earned $100,000 or more. Those claiming the deduction who earned between $40,000 and $75,000 had their tax burden reduced by less than $600.
While lower taxes are attractive—all of us would like to reduce our tax burden—the mortgage interest deduction is a regressive tax that, according to surveys, statistically has minimal impact on the decision to purchase. And contrary to what many believe, the program benefits least those who need it most.
What about the argument that the deduction encourages home ownership? If it goes away won’t ownership rates decline significantly? This is an argument that proponents have used for years—but it doesn’t hold water; and here’s why. If the subsidy actually encouraged home ownership, the U.S. should have a significantly higher percentage of homeowners than does Canada, a country similar in many ways to our own; yet without such a tax benefit. Not only do the Canadians not experience a lower rate of homeownership, their rate of ownership is slightly higher than here in the U.S.
However, I realize there would be a shock that would come to present homeowners if we were to immediately do away with the deduction and think that a phase-out over several years would be more appropriate. What I’d really like to see are macro changes in our tax structure, and adjusting the mortgage interest deduction may be a step in the right direction. Instead of eliminating the deduction, however, I think we’ll see it modified; perhaps the limits will be lowered from $1 million to $500, 000. And we may see the elimination of the deduction for second homes and home equity loans.
Ultimately, I don’t think current homeowners should be concerned. I doubt any action will come in the near-term; and changes that may come will be phased in to lessen their overall impact.