No. “The deduction has been the cornerstone of the nation’s housing policy for almost a century.”
Nielsen thinks repealing the mortgage interest deduction (MID) would be bad housing and economic policy. “Not only would it eliminate the emerging stability in housing markets and the national economy, it would increase the cost of homeownership and make the tax code less progressive.”
MID’s opponents who claim that it primarily benefits the wealthy are wrong, he contends. “The MID is a middle-class tax break. Almost 70 percent of the benefits go to households with incomes under $200,000. As a share of household income, younger owners and families with children receive the greatest benefit, and almost all homeowners claim the deduction during a significant portion of the term of their mortgage.”
Eliminating the deduction also would cause housing prices to drop by 15 percent or more nationwide, “wiping out even more wealth of prospective retirees, placing more homeowners underwater, and increasing the number of foreclosures.”
When critics attack the MID in the name of tax reform, they are actually proposing a massive tax increase on American families, says Nielsen. “Recent proposals have tried to build support for eliminating the MID by claiming that it would result in lower tax rates. Be very wary of that deal with the devil. Congress traded deductions for lower rates in 1986, and just five years later those ‘lower’ rates increased from 28 percent to 39.6 percent.”
The NAHB’s position is clear. “The mortgage interest deduction has been the cornerstone of the nation’s housing policy for almost a century,” says Nielsen. “Eliminating it would not only raise taxes, it would be a fundamental breach of faith by a government that has long supported homeownership.”
Yes. “We can no longer afford to keep this large and misdirected subsidy off limits.”
Toder doesn’t think the MID’s benefits justify its lost revenue. “The mortgage interest deduction will cost the federal government about $600 billion between 2012 and 2016. But it does little to raise homeownership because it is worth much more to high-income taxpayers who are more likely to own without a subsidy than to others.”
Toder elaborates that each dollar spent on mortgage interest reduces tax liability by 35 cents for a high-income taxpayer in the 35 percent bracket and by only 15 cents for a taxpayer in the 15 percent bracket. For the 65 percent of taxpayers who claim the standard deduction, the MID offers no benefit at all. The Tax Policy Center projects that taxpayers with incomes over $100,000 will receive almost three-fourths of the benefit from the deduction in 2015. “Instead of raising ownership rates, this upside-down subsidy encourages upper–middle-income families to incur more debt to buy bigger houses and drives up housing costs in densely populated areas.”
One alternative would replace the deduction with a uniform interest credit. The Tax Policy Center estimates that a non-refundable credit limited to the first $500,000 of debt on a primary residence could be as high as 27 percent before it would cost as much as the current mortgage deduction. “Making the credit refundable would extend the subsidy to people without income tax liability, but could not be quite as generous at the same cost,” says Toder.
Toder believes any MID reform would need to be phased in gradually, and be part of a larger tax reform that reduces tax rates, eliminates or pares back other tax preferences, and helps reduce the long-term deficit.
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