The Battle of the Home Mortgage Interest Deduction

At the recent meeting of the President’s Advisory Panel on Tax Reform, members discussed the merits of capping the mortgage interest deduction. According to a story in USA Today, some special interest groups are gearing up for a fight to protect the coveted deduction.

“When this report is issued and the debate then begins … the National Association of Home Builders is going to do its damnedest to protect the preferred treatment of housing in the tax code,” says Jerry Howard, NAHB executive vice president. [Full Story]

While the mortgage interest deduction is a popular political tool, simple economics shows us why it may be time to say goodbye to the deduction in current form. As numerous economists have pointed out, the current incentive structure makes housing virtually a tax free investment. The resulting over-consumption of housing is estimated to equal 35% of net private investment since 1980. The relationship between the mortgage interest deduction and increased homeownership is not as clear as some would believe and the benefits of the deduction mostly accrue to the wealthy. Moreover, the mortgage interest deduction is one of the largest tax expenditures in the federal budget.

You can be sure that rent-seeking groups will engage in a plethora of lobbying efforts to protect their special interests. However, lawmakers should remember the public interest when deciding the future of the mortgage interest deduction.