Mortgage Interest Deduction last chapter?

mortgage interest deduction
Mortgage interest deduction (infographic from

The mortgage interest deduction seems to be the everyone’s lovable fiscal scapegoat.  The mortgage interest deduction was almost abolished in 2010 as a means of increasing revenue after the recession.  And then again in 2012 it’s elimination was considered to increase revenue lost through sequestration.  This time the mortgage interest deduction is in Congress’ sights as a means of tax reform.

The mortgage interest deduction is a remnant of consumer interest deductions that were allowed when income tax was first collected.  It wasn’t until the 1980’s when most consumer interest deductions, such as credit card and auto loan interest, were eliminated (to reduce budget deficits after a deep recession).  The mortgage interest deduction survived in a limited form, which implemented a cap on the amount of an individual’s deductions.

The mortgage interest deduction is again embattled.  Reporting by AP’s Marcy Gordon reveals the divide in eradicating the MID (GOP eyes popular tax breaks to finance overhaul;, September 18, 2017).  The MID is viewed by some as a middle-class mainstay that is a political hot potato.  While others see the MIS as an antiquated subsidy that can be removed as part of a major tax plan.  However, the likelihood of totally abolishing the MID is slim because of the political fallout.  More likely to occur is something akin to what happened in the 1980’s, which was a narrowed version that limited deductions.  Speaker of the House, Paul Ryan hinted that the current $1million cap could be further reduced, by saying “We could change that limit — I suppose.”

Over the decades, the mortgage interest deduction has been criticized by some as poor economic policy. Those who argue against the mortgage interest deduction claim that it doesn’t increase homeownership.  They also claim that the MID is a subsidy that artificially inflates home prices, and is used mostly by the wealthy.  Additionally, the enticement of receiving a MID at the end of the year is used to encourage home buyers to buy homes that they really can’t afford.  A recent study by Jonathon Gruber (known to many as the architect of Obamacare), et al, produced results that mimics the assertions of the mortgage interest deduction critics’ (Do People Respond to the Mortgage Interest Deduction? Quasi-Experimental Evidence from Denmark; National Bureau of Economic Research, Inc; Working Paper 23600, July 2017).

Proponents of the mortgage interest deduction, such as the National Association of Realtors, and the National Association of Home Builders, claim that the MID encourages homeownership and makes it affordable for many.

As a witness in the September 13th Senate Finance Committee Hearing on Individual Tax Reform, Iona Harris (chair of NAR’s Federal Taxation Committee) testified that limiting or abolishing the mortgage interest deduction could actually have the unintended consequence of increasing taxes on millions of “middle class homeowners,” while “putting the value of their homes at risk.”

Ms. Harris stated:

“…it is estimated that American homeowners already pay well over 80 percent of all federal income taxes53 percent of individuals claiming the itemized deduction for real estate taxes in 2014 earned less than $100,000.

And recapped the outcome of the 1980’s mortgage interest deduction reduction:

“…When Congress last undertook major tax reform in 1986, it eliminated or significantly changed a large swath of tax provisions, including major real estate provisions, in order to lower rates, only to increase those rates just five years later in 1991…Most of the eliminated tax provisions never returned and in the case of real estate, a major recession followed.

Copyright© Dan Krell

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