Here’s something that people on both sides of the ideological divide can agree on: reforming the mortgage interest deduction.
Last year the federal government gave away roughly $100 billion through the mortgage interest deduction. The majority of those utilizing the deduction are wealthy, well-fed and in no need to government assistance, finds a new study.
The study, conducted by the right-leaning R Street Institute, uses Internal Revenue Service data to examine how the mortgage interest deduction is distributed across income levels and zip codes. The deduction—one of the largest tax subsidies—allows homeowners to reduce their taxable income on home mortgage balances up to $1 million, including vacation homes, and home equity loans of up to $100,000. Economists found that the deduction not only disproportionately favors the wealthy, but also encourages upper-income individuals to borrow more money for bigger houses rather than boost homeownership.
Among all major metropolitan areas, those making above $100,000 are three to four times more likely to benefit from the deduction, with nearly 85 percent taking advantage of it. The study estimates that it has contributed to home sizes increasing by as much as 18 percent in the nation’s most affluent areas and inflates home prices across the board.
A report released last year by the liberal Center on Budget and Policy Priorities shows similar findings. In 2012, among all homeowners across the country, 77 percent of those benefiting from the mortgage interest deduction made above $100,000. Around 35 percent of those benefits went to homeowners with annual incomes above $200,000.
For those making below $100,000, the difference is stark: Although some 40 percent of all homeowners make below $50,000, only 3 percent received benefits from the deduction in 2012.
Proponents of the mortgage interest deduction argue that it increases and encourages homeownership while providing a sound financial investment for the future. It is also widely popular among Americans, with support ranging between 60 percent and 90 percent. The reality, however, is that most individuals receive no benefit from the deduction. There is also no evidence that the tax benefit expands homeownership or is an added value to society.
If policymakers are serious about reducing the federal deficit and poverty, while improving the economy and rates of homeownership, they would reform the mortgage deduction. One common-sense alternative is capping interest deductibility on mortgages at up to $500,000, half of the current amount, and switching the deduction to a tax credit. Even George W. Bush proposed doing this, so it is far from a radical idea.
Capping the maximum amount would scale back subsidies for fat cats and create $24 billion in additional revenue. A tax credit would help 16 million more first-time homebuyers, low-income families and middle-class Americans justify purchasing a house, who would otherwise be on the fence between renting and owning. This proposal would raise $200 billion in 10 years with a five-year phase in period.
Both the left and right can agree on mortgage interest reform, but contention comes over how best to spend the added revenue. No doubt the GOP would want to funnel all additional revenue into deficit reduction, or further tax breaks on the wealthy, but this would do little to bolster the economy.
To be truly fiscally responsible, the savings could be used as a direct investment into our country and into the pockets of those struggling rather those who caused the economic collapse. This includes repealing the $85 billion in sequester cuts, restoring the $8 billion in food stamp benefits and extending unemployment insurance benefits. Taken together, these proposals would do much more for the economy, while alleviating pain and suffering for millions, than deficit reduction could achieve.
If legislators wanted to focus the revenue on federal housing policy, it should be targeted to help low-income renters afford housing—more than three-fourths of current housing subsidies go to homeowners, although more than one-third of Americans are renters. This includes Section 8 vouchers, which effectively reduces homelessness and housing instability, Promise Zones and the Jobs-Plus program.
Last year the U.S. spent some $38 billion on such programs that were administered through the Department of Housing and Urban Development. A majority of those relying on such programs are living in extreme poverty, have a debilitating disease or are homeless—not wealthy or owning a second home.
In our current political climate, impoverished has become synonymous with “taker.” But the amount taxpayers spend on anti-poverty programs is miniscule in comparison to the hundreds of billions Uncle Sam gives away each year in tax breaks for corporations and the wealthiest.
The mortgage interest deduction is extremely expensive for taxpayers, favors the wealthy, and is poorly designed to promote homeownership. Our current tax system has failed to build and secure a vibrant middle class. One appropriate place to start fixing that is with the home mortgage deduction.