Giuliani Wrong on Mortgage Interest Deduction

In going after former Arkansas Governor Mike Huckabee’s FairTax position, Rudy Giuliani criticized the FairTax with quite possibly the worst response possible from the perspective of sound tax policy. Giuliani didn’t question the Fair Tax on issues where it should be questioned like the issue of evasion or how its prebate will be administered. Instead Giuliani, likely out of political expediency, attacked the FairTax by defending the worst provisions in the current income tax structure, most notably the home mortgage interest deduction. From The International Herald-Tribune:

Republican presidential hopeful Rudy Giuliani criticized the “fair tax” proposal of rival candidate Mike Huckabee on Monday, saying it could hurt home buyers.

The former New York City mayor cited the struggling U.S. housing market as a reason to avoid the plan, which would eliminate all taxes on income and investments in favor of a hefty federal sales tax.

“I think there are several tax deductions that are vital to our economy,” Giuliani said. “This would not be a good time – I don’t know if there would ever be a good time to do this – to advocate ending the home mortgage deduction. The home mortgage deduction is considered by many critical to the ability of people to buy a home and keep their home.”

He also said deductions for charitable contributions and state and local taxes were important tax breaks that Huckabee’s plan would eliminate. The plan calls for getting rid of the Internal Revenue Service and giving taxpayers a monthly rebate on taxes on purchases up to the poverty line.

Giuliani’s claim that the mortgage interest deduction is critical to home buying in America is refuted by overwhelming academic research on the issue. MID does promote homeownership among some on the margin of the rent-buy decision, but much of the benefit flows to real estate agents and those who are going to buy a house regardless of the tax benefit. Study after study has shown that if we want to use the tax code to promote homeownership, there are more efficient and equitable ways of doing so such as a limited tax credit instead of the blanket subsidy to the housing industry that we currently have.

Here’s some evidence from a recent report from California’s Legislative Analyst’s Office, which suggested that the Golden State get rid of its mortgage interest deduction:

There is much evidence, though, that suggests the MID does not have a substantial impact on homeownership rates per se. One piece of evidence comes from comparisons across states. Connecticut, Illinois, Massachusetts, Michigan, New Jersey, Ohio, Pennsylvania, and West Virginia all have a personal income tax, but do not allow for MID. The homeownership rate in these states, however, is higher than the national average.

Later in the Giuliani news article, they quote him as still supporting a plan to simplify the tax code so that a return could be completed on one sheet of paper. But with all the tax breaks that Giuliani wants to keep plus those new breaks he wants to create (i.e. health insurance deduction), to fit everything on one sheet may require size four font.

For more on why the mortgage interest deduction is bad tax policy, check out our previous blog posts here, here, here, here, here, here, here, here, here, here, here, here, here, here, here, here, here, here, here, here, here, here, here, and here.