Michigan has been tangled up in a transportation funding back-and-forth for the last year or so. The most recent episode was a May ballot initiative to raise sales and gas taxes that failed 80-20. As of yesterday, news...
- The Tax Policy Blog
- Ending the Mortgage Interest Deduction?
Ending the Mortgage Interest Deduction?
As we've written before, the home mortgage interest deduction is almost uniformly condemned by economists as bad tax policy, since it distorts investment decisions and shrinks the tax base requiring higher tax rates.
Unfortunately, it survives thanks to entrenched and politically powerful interest groups—builders, home owners, realtors—who benefit from it at the expense of other taxpayers.
The status of housing as the least taxed investment in the United States, which has helped fuel an eight-year boom in real estate values, may be in jeopardy as a presidential commission considers changes to the federal tax code...
Changes to housing-related tax incentives will also be considered, Jeffrey Kupfer, the panel's staff director, said. Economists say such policies would have the effect of eroding the relative advantage housing has enjoyed over other investments since 1997, when Congress effectively made most sales of primary residences tax-free...
The toughest issue to tackle may be the mortgage interest deduction, which has long been viewed as politically sacred, former Treasury Secretary James Baker III told the panel in March.
Former Treasury Department economist Eugene Steuerle says he does not believe that housing incentives, which are worth about $150 billion annually, are off-limits. "Politically, I think the case against making changes is exaggerated," said Steuerle, now a senior fellow at the Urban Institute, a nonpartisan research group.
Linda Goold, tax counsel for the National Association of Realtors, said it's possible that the tax panel may recommend replacing the interest deduction with a tax credit that would be more beneficial to lower-income Americans. They usually don't have enough deductions to justify itemizing, a prerequisite for taking advantage of the mortgage interest deduction.
The most likely reform—if any at all—would be to transform the deduction into a credit to eliminate its regressivity.
Unfortunately, that would make a bad tax policy worse by likely carving even more out of the federal tax base, requiring higher overall tax rates, and further entrenching its political support, all of which make fundamental tax reform even more difficult than it already is.
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The Tax Policy Blog is the official blog of the Tax Foundation, a non-partisan, non-profit research organization that has monitored tax policy at the federal, state and local levels since 1937. Our economists welcome your feedback. If you would like to send an e-mail to the author of a blog post, please click on that person's name to locate his or her e-mail address or visit our staff page here.