Mortgage Deduction Needs a Closer Look

As of Friday, November 30, 2012

One thing that federal budget negotiators consider untouchable may deserve to feel the touch of reform and rethinking, though caution is in order.

We’re talking about the hallowed policy that allows homeowners to deduct the interest paid on their mortgages at income tax time.

Even passing mention of possibly tampering around the edges of that time-honored benefit is always sure to raise outraged cries.

After all, is there anything more closely tied to the American Dream than the concept that home ownership should be spread around as widely as possible — with, as the Bible says, “every man under his vine and under his fig tree”? And isn’t the ability to deduct interest payments on home mortgages a central factor in encouraging the widest possible home ownership among American families of all income levels?

Distorting the Marketplace

Well, maybe not, according to at least one expert who has conducted an exhaustive study of the subject. In fact, the deduction may well have the exact opposite of the intended effect.

Law professor Dennis J. Ventry, of the University of California in Davis, says the evidence strongly suggests that the deduction artificially inflates prices in the marketplace by making it possible for people to buy homes that they otherwise might not have been able to afford. This has to be considered one of the major factors that helped fuel the disastrous economic recession from which the nation is still trying to recover.

The deduction now applies to the interest homeowners pay on mortgages of up to $1 million, with another $100,000 allowed for interest paid on home equity loans. This system is said to cost the U.S. Treasury more than $100 billion a year. And much of that forgiven interest is paid by wealthy homeowners who could easily afford to buy the home without any assistance in the form of a deduction.

Well-Off Benefit Most

As a result, according to Ventry, taxpayers whose incomes exceeds $100,000 — who constitute just 12.4 percent of all those filing taxes — rake in nearly 80 percent of the benefits from the interest tax deduction.

One obvious way to inject some fairness into this grossly unbalanced situation — and to go a long way toward helping get federal deficits under control while not even addressing the question of raising tax rates — would be to clamp a cap on the amount of mortgage interest that can be deducted for any given home. There is also talk of taking a look at the deduction for mortgages on second homes.

It is important to note that liberal Democrats aren’t the only ones urging another look at the rules. The bipartisan Simpson-Bowles Commission offered ideas such as lowering qualifying debt to $500,000 and excluding second homes. Republican presidential nominee Mitt Romney also talked about the possibility of capping tax deductions.

The National Association of Realtors opposes any changes. Obviously, any modifications would have to be approached gradually and with sensitivity. But surely this particular tax break can no longer be considered a sacred cow.

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JimL 5 months, 3 weeks ago

The deduction for mortgage interest is just one of many deductions that has its own constituency supporting it. Others include state income taxes, charitable donations, property taxes, sales taxes (for some taxpayers). I would suggest that any effort to eliminate one specific deduction will others remain is going to result in a useless exercise. Rather than picking winners and losers among deductions, Mitt Romney's suggestion to cap deductions at a specific dollar level seems to me to make the situation much simpler because each taxpayer can select which deduction means the most to them. i.e. one person's charitable donation is as good as another's mortgage deduction.

njc17 5 months, 3 weeks ago

Another whack at the home ownership problems?

madstork 5 months, 3 weeks ago

Fair Tax solves all!

native 5 months, 2 weeks ago

I agree with fair tax, but if nothing else, only first homes should be able to be deducted.

JimHeim 5 months, 2 weeks ago

I fully agree with the editorial. Only good could come from deleting this exemption as it provides no benefit to the economy. Those who think it helps promote home ownership need only look to Canada, which has no mortgage interest deduction and yet home ownership is at the same rate as in the US.

Sadly, those who profit from the deduction are powerful entities and will thwart nay effort to eliminate it.

And the FairTax(tm) is a fraud that will never get out of any Congressional committee, for which we should all be most grateful.

MichaelFlorence 5 months, 2 weeks ago

To Mr. Heim

I am glad you consider me one of the "powerful entities" who will try to thwart any attempt fo elimante the mortgage interest deduction. I purchased my home and I pay for it every month AND I claim a mortgage interest deduction on my taxes. The benefit of this deduction allows me to keep more of the money my wife and I earn AND we spend our save that money the way we see fit. Your constant harping on trying to take more and more taxes so the idiots in Washington can spend more only shows your true side of moving us closer to a society where freedom is gone. I will agree that the deduction should have some more limitations placed on it if your income is above a certain level, but for you to say that "Only good could come from deleting this exemption" really is ignorant. As for your assumptions about the Fair Tax I would say you have never studied it and you must think our current system is great.
What I am grateful for is that my family has good health, my wife and I are employed with good jobs, and we pay our taxes and our bills.

Spocks_Brain 5 months, 2 weeks ago

Anyone thinking the deficit will ever reduce down is crazy-actually tax intake has increased dramatically as of late...the government cant stop spending....brace your selves for the end

Spocks_Brain 5 months, 2 weeks ago

Why give this government anything-they borrowed every penny out of SS, and The Pilot wants us to take our castor oil....you have to be kidding

njc17 5 months, 2 weeks ago

Sadly we are in the era of take all you can from the people so the government can meter it out back to the people as they see fit. Because of the Obama term of massive debt, no longer will the liberal stand by and let the population be allowed to make the living once promised. No longer will the ant be allowed to industrious while the grasshopper idles. We the people of the disunited states are facing a new time of huge tax intake and redistribution. they will eliminate any deductions they can find. this is just the start.