California Legislative Analyst: Repeal Mortgage Interest Deduction

January 2, 2008

California is in a budget crunch and politicians are looking for new sources of revenue. One legislative analyst has suggested the best way forward would be to eliminate some of the deductions in the state’s income tax system, including the state’s mortgage interest deduction. From the Vallejo Herald News:

California faces an estimated $14 billion budget deficit, but the state’s independent fiscal watchdog has an answer: Trim some of the tax loopholes, which total $50 billion.
Simple idea. Difficult to make happen.

Each of the hundreds of tax breaks is important to some interest group, political analysts said, and a few loopholes are perceived almost as a constitutional right.

Nevertheless, Legislative Analyst Elizabeth Hill’s recommendations on tax breaks, which she says mostly benefit the rich and corporations, are drawing attention. She even addressed the largest, seemingly most untouchable tax break: allowing homeowners to deduct mortgage interest off their state personal income taxes.

Hill said in a report that the deduction, which exceeds $5 billion a year, no longer serves its intended purpose of encouraging home ownership. She believes there are more targeted, less costly ways to aid those who need the assistance, without subsidizing wealthy homeowners.

Hill could not be more correct. While we are often skeptical of states raising tax burdens, if you are going to raise taxes, doing it in the most economically efficient and neutral manner is the way to go as opposed to raising tax rates on narrow bases.

Of course the California Association of Realtors and homebuilders associations across the state will be all over any proposal to limit MID with their armies of lobbyists descending on Sacramento and (incorrect) claims of how the deduction is great for the economy or how it’s a great way of promoting homeownership. The fact of the matter is that Hill is correct – if you feel it is necessary for government to promote homeownership, there are much more efficient ways to do it. And just because some policy has been place for a long time does not mean it is the right policy.

And if one wants to extend this concept further and help solve the budget impasse, we can move to limit the massive subsidies that flow to California’s higher education system too, which are not very efficient at promoting higher education given their costs.

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