The mortgage interest tax deduction: Arguments to save and eliminate it

by Dan Krell © 2010
www.DanKrell.com

When I wrote about the demise of the mortgage interest tax deduction (MID) just over a year ago, many people found the idea intolerable. As budget deficits continue to be an issue, the MID seems to be on the chopping block again. And for some people, that’s just fine.

You see, the MID has been under attack for many years by those who have argued that the MID is poor economic policy. Critics of the MID claim that it not only entices consumers to purchase homes that they can’t afford; it does nothing to increase home ownership, it inflates home prices and is mostly used by the wealthy.

Conversely, arguments are made by proponents that the MID makes housing more affordable and encourages home ownership; of course, one of the more vocal advocates is the National Association of Realtors® (NAR). In a December 1, 2010 press release, NAR president Ron Phipps stated “The tax deductibility of interest paid on mortgages is a powerful incentive for home ownership and has been one of the simplest provisions in the federal tax code for more than 80 years. In a new survey commissioned by NAR and conducted online in October 2010 by Harris Interactive of nearly 3,000 homeowners and renters, nearly three-fourths of homeowners and two-thirds of renters said the mortgage interest deduction was extremely or very important to them.” (Realtor.org)

If you’re wondering how the MID began, its origination is not extraordinary (although its preservation could be described as remarkable). An article written by Roger Lowenstein (“Who Needs the Mortgage-Interest Deduction?”; The New York Times, March 5, 2006) offers a fact/fiction history of the MID. Although written as a critique of the MID (Lowenstein calls the MID “patently regressive”), the article is referenced by many on both sides of the issue as a source of historical information.

According to Lowenstein, the MID, like all loan interest, was deductable when income tax was first collected. As consumer credit ballooned (credit cards, auto loans, etc), people took advantage of the tax “loop hole” to deduct the interest paid on their consumer loans. It was not until the 1980’s, (during a different recession) that Congress acted to reduce deficits by eliminating interest deductions from some consumer loans (such as credit cards); however, the MID survived (albeit in a limited form).

Is it Déjà vu, or just unavoidable? It was just last year when the Congressional Budget Office made recommendations to eliminate the MID. However, the most recent attack on the MID, also as a means to reduce budget deficits, came earlier this month from the National Commission on Fiscal Responsibility and Reform (also known as the President’s Deficit Reduction Commission). The Commission’s report, “The Moment of Truth: Report Of The National Commission On Fiscal Responsibility And Reform, December 2010” recommends that the MID be further limited by capping the mortgage limit from $1M to $500,000 and eliminate the MID from second homes and home equity lines.

Advocates of the MID say that proposed changes will hurt an already suffering housing market, while critics say that elimination of the MID can help stabilize the housing market; regardless, both sides agree that further limitations on the MID will depreciate housing prices. Where do you stand on the issue? Get involved and voice your opinion to your Congressperson.

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Comments are welcome. This article is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of December 6, 2010. Using this article without permission is a violation of copyright laws. Copyright © 2010 Dan Krell.