As debate rages over a possible reform of the home 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. , members of Congress continue to defend the subsidy and ignore the economic benefits of reforming it. From Reuters:
Republican members of the U.S. House of Representatives 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. panel urged Treasury Secretary John Snow to ignore proposals to eliminate the mortgage interest rate deduction, in a letter released on Friday.
Snow is studying plans to overhaul the U.S. tax system. A panel of experts and former politicians proposed streamlining the U.S. tax code, eliminating some taxes and cutting tax rates, but canceling popular current tax deductions.
Eight GOP members of the House Ways and Means CommitteeThe Committee on Ways and Means, more commonly referred to as the House Ways and Means Committee, is one of 29 U.S. House of Representative committees and is the chief tax-writing committee in the U.S. The House Ways and Means Committee has jurisdiction over all bills relating to taxes and other revenue generation, as well as spending programs like Social Security, Medicare, and unemployment insurance, among others. said proposed cuts to the mortgage interest benefit and the deduction for state and local income taxes would remove incentives for homeownership.
“While many investment opportunities exist today, perhaps none provides more return for individuals, families and communities than homeownership,” the lawmakers wrote. (Full Story)
Clearly the deduction for home mortgage interest injects money into the housing market. But what are the consequences of that? While it may help some afford larger houses (especially those who itemize on their 1040), it also artificially inflates real estate and housing prices, which pushes others out of the home market entirely.
Also, when money articificially flows into housing thanks to state subsidies, it takes money away from other forms of investment like plant and equipment, creating costly economic distortions. When thinking about the home mortgage interest deduction, lawmakers should look beyond the first order benefits and consider the secondary negative impacts as well.
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