Have We Seen the Last of the Mortgage Deduction?

President Obama’s budget deficit commission is considering one option for reducing the national debt: reducing or eliminating the mortgage interest tax deduction. The idea has made no small stir in the mortgage market community.

The current mortgage tax break is one of the costliest for the U.S. government. It is used by 35 million American homeowners each year, enabling them to deduct all the interest paid on their mortgage for their primary residence and a certain percentage of interest paid on vacation or rental home mortgages. The government is estimating that this deduction will result in $131 billion lost from potential revenue.

Some proposals call for removing this tax perk altogether, while another would allow borrowers to deduct interest only on primary residence mortgages, and only those with a maximum price tag of $500,000, instead of $1 million as it stands now. The Wall Street Journal blog says that about 70 percent of the home tax deduction benefits go to the top 20 percent of taxpayers (those with the highest incomes.)

Here are the pros for getting rid of the tax break:

  • “There is an increasing understanding that single-family housing has been over-subsidized, and that’s to the detriment of the broader economy.”
    -Mark Zandi, chief economist at Moody’s Analytics
  • Allowing borrowers to deduct interest on home equity loans promotes reckless behavior.
  • “No one can make a serious intellectual argument in favor of the mortgage interest deduction. Why should the government subsidize homeowners rather than renters? The only thing it’s good for is middle-class votes.”
    -Calvin Johnson, a tax professor at the University of Texas

And the cons:

  • “Housing is critical to the economy. In my view, [losing the deduction] will surely put us in a broader economic recession.”
    -Lawrence Yun, chief economist for the National Association of Realtors
  • It could have a detrimental impact on expensive coastal homes as well as vacation home communities, -Attributed to Robert Dietz, tax economist for the National Association of Home Builders.
  • “The mortgage interest deduction is one of the pillars of our national housing policy. Limiting its use will have negative repercussions for consumers and home values up and down the housing chain.”
    -Michael D. Berman, chairman of the Mortgage Bankers Association. (Quoted in the New York Times)

Based solely on “fairness,” it would not seem that the mortgage-interest tax deduction fits the bill, but because so many current homeowners depend on this saved money, I think it could only be done away with by being phased out slowly.

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