At the recent meeting of the President’s Advisory Panel on TaxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. Reform, members discussed the merits of capping the mortgage interest deductionThe mortgage interest deduction is an itemized deduction for interest paid on home mortgages. It reduces households’ taxable incomes and, consequently, their total taxes paid. The Tax Cuts and Jobs Act (TCJA) reduced the amount of principal and limited the types of loans that qualify for the 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.
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