The Effects of Lowering the Cap on the Home Mortgage Interest Deduction

Recent reports suggest that the Trump administration is looking to limit 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. as another means to pay for lower 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. rates as part of tax reform.

Against both current law and the House GOP Blueprint, lowering the cap on the home mortgage interest deduction would raise about $300 billion over the next decade from primarily high-income taxpayers.

Under current law, individuals who itemize their deductions can deduct mortgage interest paid on up to $1 million of home mortgage debt principal. This effectively creates a limit on the amount of mortgage interest a taxpayer can deduct.

Lawmakers could broaden the individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. base by further limiting the home mortgage interest deduction on loans up to $500,000 worth of principal. This would reduce the amount of mortgage interest individuals could deduct against their taxable incomeTaxable income is the amount of income subject to tax, after deductions and exemptions. For both individuals and corporations, taxable income differs from—and is less than—gross income. , especially for high-income taxpayers, who tend to have larger houses, more mortgage debt, and live in areas with more expensive homes.

We estimate that capping the home mortgage interest deduction to mortgage debt of $500,000 would raise $319 billion over the next decade. This is enough revenue to reduce the corporate tax rate by about 3 percentage points. This estimate assumes that the cap would apply to all existing mortgages. Any phase-ins would reduce the amount this cap would raise over the next decade. For example, lawmakers could apply this limitation to mortgages received after enactment.

The Effect of Capping the Home Mortgage Interest Deduction at $500,000 of Acquisition Debt, Billions of Dollars, (2017-2026)

	In the context of current law	In the context of the House GOP Blueprint
Source: Tax Foundation, Taxes and Growth Model (March 2017 version).
Static	$319	$285
Dynamic	$298	$280

Reducing the cap on the home mortgage interest deduction would increase taxes primarily for high-income taxpayers. The largest tax increase would fall on taxpayers in the top 1 percent. They would see their after-tax incomeAfter-tax income is the net amount of income available to invest, save, or consume after federal, state, and withholding taxes have been applied—your disposable income. Companies and, to a lesser extent, individuals, make economic decisions in light of how they can best maximize their earnings. fall by 0.62 percent. A small number of taxpayers in the middle quintiles would see a tax increase, but it would average less than one-tenth of 1 percent.

Change in after-tax income by quintile from Capping the Home Mortgage Interest Deduction at $500,000 of Acquisition Debt

	In the context of current law	In the context of the House GOP Blueprint
Source: Tax Foundation, Taxes and Growth Model (March 2017 version).
0% to 20%	0.00%	0.00%
20% to 40%	0.00%	0.00%
40% to 60%	-0.01%	-0.03%
60% to 80%	-0.05%	-0.06%
80% to 100%	-0.39%	-0.34%
80% to 90%	-0.12%	-0.14%
90% to 95%	-0.27%	-0.27%
95% to 99%	-0.53%	-0.47%
99% to 100%	-0.62%	-0.48%
ALL	-0.23%	-0.21%

The estimates above represent how much this cap would raise if fully enacted starting in 2017 and would apply to all existing mortgages. Lawmakers may want to ease the impact of this cap on taxpayers and the housing market by phasing it in over a number of years. Lawmakers may also likely apply the cap to only new mortgages. Interest from mortgage debt acquired before enactment would still be deductible as an itemized deductionItemized deductions allow individuals to subtract designated expenses from their taxable income and can be claimed in lieu of the standard deduction. Itemized deductions include those for state and local taxes, charitable contributions, and mortgage interest. An estimated 13.7 percent of filers itemized in 2019, most being high-income taxpayers. under current law.

There are many ways lawmakers could go about doing this, but I will model a policy similar to one that Tax Policy Center modeled late last year. This proposal would slowly phase-in the cap from $1 million acquisition debt to $500,000 acquisition debt over five years. Using NAHB data, I will also only apply the cap to newly acquired mortgages.

We estimate that phasing in the cap over five years and only applying it to new mortgage debt would raise $95.5 billion over the first decade, which is about 30 percent of the revenue impact of a fully-phased in cap.

The Effect of Capping the Home Mortgage Interest Deduction at $500,000 of Acquisition Debt with Phase-in, Billions of Dollars, (2017-2026)

	In the Context of Current Law	In the Context of the House GOP Blueprint
Source: Tax Foundation, Taxes and Growth Model (March 2017 Version)
Static	$95	$82
Dynamic	$92	$81

Share this article