An end to the mortgage deduction?

Is it time to get rid of the home mortgage interest deduction? reports today on a study from Kansas State University that says because most of the tax break goes to people making more than $100,000 a year, it doesn’t adequately help the more dense urban cities.

Turner’s study, based on household data collected from 1984 to 2007 by the Panel Study of Income Dynamics, showed that in denser, urban cities with limited available housing, the deduction has a negative impact because it both reduces homeownership and inflates housing prices.

“It’s just driving up prices, which makes it harder to come up with the down payment,” she said.

Believing in the theory that homeowners have more of a stake in the success of their community, Turner noted it’s those urban areas where homeownership is needed the most to improve the community as a whole.

The mortgage deduction has been termed “America’s favorite deduction,” but as tax day approaches, it seems harder to find its friends.

ING Direct boss Arkadi Kuhlman, writing in the Wall St. Journal today, theorizes that it allows borrowers to spread their home payments out over too many years. He favors a deduction based, instead, on principal payments, rather than interest.

Must the U.S. government remove itself entirely from the mortgage market–or take away every family’s favorite tax deduction–to fix it? Not necessarily. Congress could as easily create an incentive for consumers to pay down their mortgages by letting them deduct payments on principal, rather than on interest.

A successful model exists to our north. In Canada, the interest on mortgages is not tax deductible, which gives homeowners good reason to pay down their principal as quickly as possible. Canadian banks also hold about 75% of their loans on their books, which encourages more prudent lending. Thanks to such policies, just 1% of Canadian mortgages are currently in foreclosure or delinquent, compared to about 14% of American mortgages. The Canadian real estate market has already rebounded above pre-recession levels.

Should the mortgage interest deduction be phased out in its current form?customer surveys

  • Carolyn

    No, only because as a childfree adult, this is the only tax break I get!

  • Josh

    I agree with Carolyn.

  • As a childless adult who is also a renter, I want this credit gone. Not only do I not get to take advantage of it, but since it artificially inflates housing prices, it makes it more difficult for me to cease being a renter and buy a house.

    The mortgage interest tax deduction and deductions like it, such as ethanol subsidies, are pieces of tax policy that do much economic harm by distorting markets unnecessarily. Where there are public policy outcomes that the people see as worthy of aiming for, they can be achieved in much more targeted, less distorting ways.

  • Breynolds

    Wow. No way. To remove this deduction would screw so many people it is ridiculous. It would, in one fell swoop, raise my tax burden by almost $3000 a year, easy, and my house is not very valuable at all.

    I don’t rightly care what the tax deduction does to the high density urban areas. All I know is that is raises the taxes on the vast majority of Americans, and is about the dumbest thing I have every heard come out of smart people’s mouths.

  • Tyler

    Hey Doc Gonzo

    Can we strip your Certificate of Rent Paid refund, too? That only seems fair – buyers lose their deduction, and renters lose their property tax refund.

  • linda

    If the poorest among us are losing healthcare, access to prosthetics and eyeglasses, and food supports, the middle class can step up to share the pain.

  • Snyder

    It seems to me that instead of doing away with this deduction, it would make more sense to cap the income levels at which it can be claimed, like is done with other deductions.

    Not everyone taking it makes $100,000 or more and those of us who don’t, depend on it.

  • If a person who’d consider buying a $300,000 home has $400-$500/month less buying power with out the deduction, the value of that property may need to adjust until it becomes affordable under the new tax structure. It seems like that has the potential to knock down property values by, what, 20-25%?

  • Hillary

    I’m with Doc Gonzo.

    And they did take my renter’s rebate last year, when they lowered the eligibility. If the state is correct about 15% of rent applying to property taxes, a very back-of-the-envelope calculation says my landlord is collecting about $10k more for taxes than the building’s assessment, or $25 per month per unit.

    How about if the mortgage interest deduction and property tax rebates follow the same income scale as the renter’s rebate?

  • Jeff

    I’m curious about how the phaseout would work. I’d made a committment to own a home based on a *reasonable* assumption that I’d be able to reduce the interest cost through tax preference. I’m essentially stuck with a 25+ yr. obligation, having already lost $200k+ in value. If the mortgage interest deduction goes away, I lose more home value because a potential home buyer’s loan is now less advantageous, and my existing loan also gets more expensive. I’m a middle class taxpayer, but because I’m still making my payments & haven’t lost my money pit yet, I’m not seen as suffering. I don’t think that’s fair. To lose the mortgage interest deduction seems just one more kick in the chops. If there could be a way to grandfather existing loans, to phase out the deduction for higher loan balances or incomes, or to invert the deduction or phase out to property value changes, I’d be more open to a discussion. To say that the deduction is just a give-away to the rich and doesn’t affect middle class taxpayers does not reflect my reality.

  • Bob Collins

    //make more sense to cap the income levels at which it can be claimed, like is done with other deductions. Not everyone taking it makes $100,000 or more and those of us who don’t, depend on it.

    But a lot of joint filers ARE making $100,000. Playing devil’s advocate, why does the tax policy have to always consider only the low-income? It seems a slippery slope to base a policy on, “I’m not making $100,000, so therefore you shouldn’t be entitled to a tax credit or tax break?”

    Should they also not be allowed to claim their property tax credit either?

    What do you think about the idea of changing the deduction to principal-based, rather than interest-based.

    I know in my case, I’m nearing the end of my mortgage, so it’s almost entirely principal now and, hence, I don’t get much of a deduction. Would I have paid it off faster — and in the process, presumably, created a more stable foothold in the neighborhood — if the deduction were based on principal? Hard to say.

    But it would tend to favor long-term “investors” in a neighborhood and wouldn’t that go a long way to making them stronger?

    BTW, in removing the deduction, I presume it would be accompanied by a lower tax rate, rather than simply remove the quid w/o a pro quo. Sort of like what Reagan did when he got rid of the deduction for credit card interest.

  • Tyler,

    The mortgage interest deduction is entirely different from the property tax “circuit breaker” for both homeowners and renters. The property tax refund is targeted at people whose property taxes are high relative to income, whether they are renters or homeowners. I’m fairly certain that the refund is more generous to homeowners than renters.

    I think that there is some value in providing relief to people who have low, fixed incomes but see their property taxes go up year after year due to forces beyond their control. As for me, I haven’t received the renter’s credit in years: our household income is significantly above the cutoff.

  • Kassie

    There was a deduction for credit card interest? Man, I would have cleaned up with that one…

    While the mortgage deduction is my bread and butter come tax time, I’d be for phasing it out. They could do what they do with student loan interest, you can claim X dollars of it if you make less than Y dollars. But if you make more than Y, you can only claim a percentage of X based on your income.

  • Lily

    It is the only tax deduction we have and we are tax’d to the max–local, state and federal.

    Find another shoe to chew on, please.

  • John O.

    //If the poorest among us are losing healthcare, access to prosthetics and eyeglasses, and food supports, the middle class can step up to share the pain.

    Linda, that is exactly what the Republicans want: Poor vs. Middle Class. It’s entertainment for the rich who will continue to skim off the cream of whatever Boehner and the banking industry can muster up.

    I would rather see the deductibility for that proverbial “cabin” get reduced or eliminated as well as deductibility for those large RVs and/or houseboats moored (or drydocked) at a ritzy marina.

  • Rich

    Not only does it encourage excessive investment in homes, it encourages doing it with debt. It is symptomatic of our fondness for endless subsidies and distortions to promote home ownership.

    All these schemes are useless attempts to fiddle with housing demand without dealing with housing supply. Maybe the answer is to encourage the construction of lower cost housing.

  • tboom

    I don’t believe the problem is the mortgage deduction itself.

    It seems to me the problem is that the standard deduction has grown so large relative to what those of us at the lower end of the pay scale are making. We can’t make a mortgage payment large enough to take advantage of the mortgage deduction. Same goes for charitable deductions, can’t donate enough to MPR etc. to push ourselves beyond the standard deduction.

    From a strictly financial point, we might as well rent and not give to any charities. That’s not how we run our lives, but the government isn’t giving us any incentive to participate in the American dream.

  • Jamie

    Wow. Some really thoughtful comments here. I had never thought much about this before. Kerri Miller should do a show on this topic.

  • Drae

    Yes, get rid of this deduction, BUT do it the right way – by passing the Fair Tax.

    The entire tax code is a disaster. No country or economy is well served by a tax code that lends itself to manipulation for purely political reasons. Tax reform should be at the very top of the conservative agenda. Why it’s not is anyone’s guess.

  • Drae

    Some of these comments are priceless, I have to say.

    We the People need to rethink the entire tax code. Today, the most regressive and punative tax we have are payroll taxes. They hit the working poor the hardest. The ultra-rich pay them not at all. The ultra-rich can also afford to set themselves up so they don’t pay income taxes at all. They don’t fund Social Security this way, either.

    There is a better way, a simpler way. The Fair Tax is an idea whose time has come.

  • Paul

    //I would rather see the deductibility for that proverbial “cabin” get reduced or eliminated as well as deductibility for those large RVs and/or houseboats moored (or drydocked) at a ritzy marina.

    This is an outstanding point. Is there someone who wants to defend the deductibility of mortgage interest on second homes and vacation properties? I’d be interested to hear those arguments, if they exist.

    I’d like to see a phase-out (only deductible for homes purchased before 2011) or an income cap. I don’t have a personal interest since I rent and have no specific desire to own, but it is a bit of slap in the face every year when I get the Certificate of Rent Paid to remind me that I forked over $18,000 but none of it is deductible because our household income is well over the $53k limit. Imposing such an income limit on homeowners appeals to my sense of fairness.

  • Snyder

    Late to respond to Bob’s question, but I do think a deduction based on principal rather than interest is worth considering. It definitely would encourage more stable homeownership.

    I think there would need to be some sort of cap on that as well, though. If you can afford a $1 million McMansion, you probably don’t need a deduction as much as someone who is buying a $150K townhouse.

    And how do we get that credit card interest deduction back? I sure could use that one! 🙂

  • lm

    hope the government removes the tax deduction on expensive homes in affluent areas. These people really don’t need a tax break since they can easily afford the huge mortgage monthly payments.

    Alternatively tax deduction on principal will motivate them to pay off the principal early which would save the government from unnecessary foreclosures. Also the houses wouldn’t inflate ridiculously in such areas.