Some Facts About the Mortgage Interest Deduction
November 15, 2005
Not to anyone’s surprise, the realty industry has come out against the tax reform panel’s attempt to limit the federal government’s subsidization of their industry. From the Charlotte Observer:
The National Association of Realtors is “extremely upset” at a federal panel’s proposal to reduce the home mortgage interest deduction, its chief economist said recently at the group’s annual convention.
“We’re in shock,” said David Lereah, who said the Realtors had been promised that housing and charitable deductions would be protected. “Now this Bush commission has put all the housing subsidies on the table.”
The proposal, by the President’s Advisory Panel on Federal Tax Reform, “is not a trial balloon,” Lereah said. It’s not something the panel floats, fully expecting to trade it away later in exchange for something it really wants from the real estate industry. (Full story.)
Ask any economist that does not speak for the homebuilding or real estate industry and he or she will tell you that the home mortgage interest deduction has little economic justification.
Unfortunately, much of the backlash against proposed reforms has been within an income-class-distributional framework. Many of the defenders claim that limiting the deduction would hurt middle-class homeowners. However, they seem to ignore a simple fact: in order to take the deduction, you must itemize when filing taxes. And who tends to itemize rather than take the standard deduction? High-income earners.
Over 90 percent of householders making over $200,000 in 2003 itemized, while less than 40 percent of households making under $50,000 in 2003 itemized. (See IRS Filing Statistics (Excel)).
Also, the Panel’s recommendations do not eliminate the deduction. They merely scale it down, especially at the top end (i.e., high property values). The proposal actually expands the deduction for lower and middle income homeowners who do not itemize. If anything, the Panel’s proposals would help the middle class.
Given the fallacy of the “middle-class homeowners will be hurt” defense of the mortgage interest deduction, it’s our hope that all parties can look beyond the game of short-term winners and losers and support policies that improve the economic well-being of society as a whole.