Tax credit or deduction?
by Dan Krell © 2009
The mortgage interest tax deduction (MID) has been around for a long time. In fact, the MID (along with other interest tax deductions) was allowed since 1913. Throughout its history there have been many considerations to increase tax revenue by reducing, eliminating or phasing out the MID. In recent years, the Bush administration considered alternatives to the MID, and now the Obama administration is considering the options on the disposition of the MID.
In its August 2009 report to the House and Senate Committees on the Budget (Budget Options, Volume 2), the Congressional Budget Office (CBO) presented suggested options to assist policy makers in the budget process. Included in the report was their proposal for the MID. Much like the previous’ administration’s considered changes to the MID, the CBO’s report discussed either reducing the MID beginning in 2013 (as the CBO report states, “when the housing markets are expected to have recovered from their current turmoil”), or converting the MID to a home buyer tax credit (CBO.gov).
Proposed changes to the MID have typically been met with strong opposition by housing proponents, such as the National Association of Realtors and the National Association of Home Builders. During the Bush Administration’s contemplation of reducing the MID, then NAR President, Al Mansell, sent a letter to the President’s Advisory Panel on Tax Reform stating reasons for not changing the MID. Mansell’s letter makes many points in favor of the MID, among them include that the tax system supports homeownership and makes homeownership affordable. Additionally, the removal of the MID may cause a deflationary spiral of home prices (keep in mind this letter was dated October 14, 2005).
MID opposition include many economists who challenge the need for continuing the MID with arguments that the MID does not promote home ownership (and may in fact contribute to the inflation of “affordable” housing), and (contrary to claims that it helps lower to middle income home owners) a disproportionately larger number of home owners who claim the MID are in the upper income brackets.
Studies that present housing data indicate that the MID has little to no effect on home ownership. One such study, a 2007 report by the California Legislative Analyst Office (www.lao.ca.gov), indicated that home ownership rates were higher than the national average in the eight states that do not allow for a state MID. Additionally, the report cited other studies that showed there was no clear relationship between the MID and national homeownership rates as their variances over a forty year period were not congruent.
The California Legislative Analyst Office study also reported income data that co
rroborated a 2006 study by the Tax Foundation (taxfoundation.org) that a higher proportion of home owners who use the MID are in the upper income brackets. The Tax Foundation study analyzed 2003 IRS data that indicated that a significantly higher percentage of home owners (nationwide) who claimed the MID had an adjusted gross income of $75,000 or more.
Proposed changes to the MID are always controversial, but the timing may right for such a change. The ultimate demise of the MID may come from an unlikely source gaining additional support to boost the housing market- the first time home buyer tax credit.
This column 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 October 19, 2009. Copyright © 2009 Dan Krell