Yesterday, in a post about the President’s Commission on Fiscal Responsibility, I mentioned that co-chairs Alan Simpson and Erskine Bowles suggested, amid a long laundry list of federal programs to be cut, the elimination of the mortgage tax deduction. While I deduct my mortgage interest when calculating my taxes each year, just like everyone else who can do so, I’d never really given much thought to the longterm ramifications of the policy. Fortunately, though, a few folks in the MM.com audience have. Following are some of their comments:
For what its worth, the mortgage tax deduction has been a key driver of urban sprawl and McMansionization for decades… doing away with it (in combination with an increased gas tax) could have some real positive long-term effects.
As Brandon points out, the mortgage interest deduction is a massive social engineering scheme, in the favored parlance of the right: it encourages people to buy (rather than rent) larger houses on larger lots further from the cities than they might otherwise choose if left to themselves. (For all you homeowners – remember when you were making the choice to rent or buy? I’m sure you remember the propaganda about how buying was the right choice due to the tax breaks, and how you should stretch yourself to buy a house for that reason even if you might otherwise not consider it.)
The deduction both encourages consumption of larger homes, by promising a larger tax break for larger mortgages, as well as masking the true cost of these mortgages to the borrower. And, as we’ve seen demonstrated over the past few years, encouraging people to stretch themselves into homeownership – and stretch into the biggest houses they can afford – is hardly the path to wealth-creation that we’ve made it out to be.
But there’s also the issue that the mortgage interest deduction is a somewhat regressive tax – it primarily benefits those on the upper income end of the scale. Wealthier taxpayers are in higher marginal tax brackets, so benefit more from deductions (especially if it bumps them down into a lower tax bracket), as well as typically owning larger and more expensive homes, and so having a larger chunk of interest they can claim. Look at the piece where they’re offering an option of “Maybe we don’t eliminate the deduction – but we just cap it to the first $500,000.” Is this really a blow to the middle class?
Take away the name, and just look at a description of what we’re talking about: an expensive and regressive tax break that creates massive market distortion in the name of social engineering purposes with questionable benefits.
In any other case, we’d be howling to end this sucker, with Speaker Pelosi leading the charge – but since we all benefit to some small degree (or want to save it so that, someday, we’ll make enough money that we can benefit), it’s a hot-button topic. As is, we’ll probably have to phase it out – since there are still plenty of folks out there who couldn’t really afford to buy the houses they bought, even losing the relatively small benefit of the mortgage interest deduction could put them over the edge if removed suddenly.
I haven’t had a ton of time to think about the rest of the pieces of the chairmen’s proposal, but ending the mortgage interest deduction is a clear win.
I know it’s probably unpopular to say so, but, now that I’ve thought about it for a little while, I’m inclined to agree. I don’t know that it would be wise to pull the rug out from under people all at once, but it seems to me that we could do something where the deduction was phased out over a period of time, like five years. As Murph points out, though, it’s unlikely that voters will go for it, as it’s a popular deduction, especially when there are other fish to fry, like the reestablishment of the estate tax and the repeal of the Bush tax cuts for the super-rich, but I think it’s worth adding to the list of things that, in a perfect world, we’d eliminate in favor of deductions designed to encourage conservation, education and investment in our communities. I know the repeal of the deduction would likely mean less money in your pocket, but I’m curious as to what you think.