Republicans Defend Home Mortgage Interest Subsidy

As debate rages over a possible reform of the home mortgage interest 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 tax 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 Committee 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.