Every so often, I happen across an article about eliminating the mortgage tax deduction. The frequency of these articles has increased rapidly as those with little understanding of economics or history who were elected to our legislature seem determined to impose austerity on the country (curiously many of these same politicians who railed against debt and spending during the election also voted for an unfunded tax cut that some estimate could increase the deficit by $700-800 billion. But I digress).
Anyway, there was an article by Don Lee in the Los Angeles Times today that discusses the possibility of eliminating the mortgage tax deduction.
There are some interesting factoids in the article, especially regarding the fairness of the tax deduction. According to the article, Americans saved $85.5 billion in taxes as a result of the mortgage tax deduction. Of this, 75 percent of the savings goes to people who make $100,000 or more. Additionally, half of all homeowners, and only about 25 percent of taxpayers benefit from the deduction. The tax deduction also disproportionately benefits those who live in more expensive homes.
The article says that “it’s no longer so clear that near-universal homeownership should be a paramount goal”. It is worth noting that the mortgage interest deduction originally had nothing to do with promoting homeownership. Rather, it is an artifact from a time when ALL interest was deductible. Interest payments were generally considered business expenses at a time when homeownership was much less widespread than it is now (and most homes were owned outright), and income from rents generated lots of revenues (for more on the history of the mortgage interest deduction, this blog post by Barry Ritholtz is a good read).
The National Association of Realtors has already started apre-emptive campaign in support of the mortgage tax deduction, saying that home values would fall about 15 percent if the deduction was eliminated.
Honestly, I think this whole debate is kind of moot. I personally can’t fathom a repeal of the mortgage interest deduction. Not because I have an overwhleming affinity for it, but because I don’t think there is a politician in America who would like to alienate nearly every homeowner in their district. This position would be politically suicidal, and in my experience, remaining in office is of the utmost concern to most politicians. The only way I can see the tax deduction rolled back would be if it was done gradually, over time, at some point in the distant future that would not affect any current homeowners or voters.
