Housing Sense Blogger, Kim Skobba
Note from Michael Dahl, HOME Line Public Policy Director: The following is a blog post ripped from the pages of the Housing Sense blog. If you aren’t already subscribed to this very informative blog, check it out by visiting: http://housing-sense.blogspot.com/
In March, guest blogger Michael Dahl wrote about the inherent unfairness of the mortgage interest deduction. At the time, I thought he was pretty brave to bring up the issue. The mortgage interest deduction is sacred in our home ownership society. Yet these are tough times and no tax expenditure, even the mortgage interest deduction, is off limits.
A new report by the Urban and Brookings Institutes examines the impact of changes to the MID by income, race, and location of homeowners. The authors estimate the effects of eliminating the deduction and of replacing it with four options that include different credit formulas. Here is what they found:
- Eliminating the MID would affect high-income taxpayers more than for lower income taxpayers. Not surprising, since they are the primary beneficiaries of the MID. However, the very highest income taxpayers, would experience a relatively small loss in income because their mortgage costs as a share of income are lower than for other groups.
- Replacing the MID with one of the four tax credit options examined would benefit taxpayers in the bottom four quintiles of the income distribution and hurt taxpayers in the top quintile.
- Replacing the MID with either of the non-refundable credit options would raise average taxes among Asians, lower average taxes for blacks and Hispanics, and leave average taxes on whites about the same.
- Eliminating the MID would raise taxes more for suburban residents than for those in central cities or outside metropolitan areas.
Many of you may be thinking that changing the mortgage interest deduction in the midst of a housing crisis is a bad idea. This might be the case if we needed more higher income households to move into home ownership, but as the authors of this study point out:
…the current MID is not a cost-effective tool for increasing homeownership because its main beneficiaries are not individuals on the margin between renting and owning.
The mortgage interest deduction was not designed as a tool to encourage home ownership. If we are looking for incentives to increase home ownership, then we need policies that benefit those on the margin between renting and owning.
