Mortgage Interest Deduction last chapter?

mortgage interest deduction
Mortgage interest deduction (infographic from keepingcurrentmatters.com)

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; apnews.com, 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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Disclaimer. This article is not intended to provide nor should it be relied upon for legal and financial advice. Readers should not rely solely on the information contained herein, as it does not purport to be comprehensive or render specific advice. Readers should consult with an attorney regarding local real estate laws and customs as they vary by state and jurisdiction. Using this article without permission is a violation of copyright laws.

Housing approaches the fiscal cliff

by Dan Krell
DanKrell.com
© 2012

Fiscal cliffMoving forward after the election, there are a number of events and possible legislation that could impact the real estate industry. The most imminent is the “fiscal cliff.”

The “fiscal cliff” is the term that describes the expected economic outcome of the automatic budget cuts (sequestration). Sequestration was part of a budget deal that was passed as the bipartisan Budget Control Act of 2011. Even though it is described as an economy falling off a cliff, some say it is more apt to an economy hitting a brick wall; because the sequestration will make it very difficult for the economy to expand. Others are not as pessimistic about the fiscal cliff; some describe the “cliff” as a gentle slope that may present some impediments to the economy that are not insurmountable.

Regardless of the description, there is a consensus that there will be some economic obstacles. There is an economic truth that the housing market benefits from a thriving economy, as well as suffering when the economy slows.

The Congressional Budget Office has provided warnings that a “fiscal cliff” could cause a recession in 2013 and possibly increase unemployment significantly. As we already know, a recession combined with increases in unemployment will not be good for the housing market. In a Florida Realtors® 2010 study conducted to determine causes of foreclosure in Florida, determined that there is a correlation between unemployment and foreclosure – citing a combination of increased cost of living, unemployment or decreased pay, and other factors.

To address budget deficits and avoid a fiscal cliff, various committees have convened and provided recommendations proposal for improve the budgetary process that included a number of recommendations to lower the budget deficit. One common thread in addressing budget deficits is to either eliminate or further restrict the mortgage interest deduction.

The origination of the mortgage interest deduction is not as extraordinary as you’d expect; however the fact that it has remained through tax reforms during the Reagan administration has been described as rather “remarkable.”

Fiscal cliffThe mortgage interest deduction is often described as a subsidy for the housing industry to encourage participation in market (similar to the first time homebuyer tax credits offered several years ago). Much like social security, it is a political hot potato that elected officials are hesitant to address. Some have argued for many years that the mortgage interest deduction should be eliminated since because they assert the subsidy artificially inflates home prices.

However, a National Association of Realtors® (NAR) December 1, 2010 press release, 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…” The release cited a survey that indicated that the deduction was extremely important or very important to three-fourths of the 3,000 homeowners and renters surveyed (Realtor.org).

Several years ago, the Congressional Budget Office recommended the elimination of the mortgage interest deduction. Additionally, the bipartisan National Commission on Fiscal Responsibility and Reform (more commonly known as the Simpson Bowles Commission) provided recommendations to reducing the mortgage interest deduction benefit from the current $1,000,000 limit to a cap of $500,000.

A resolution to the fiscal cliff may be reached before year’s end; the housing recovery depends on it.

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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 November 12, 2012. Using this article without permission is a violation of copyright laws. Copyright © 2012 Dan Krell.
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The mortgage interest tax deduction: Arguments to save and eliminate it

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.

by Dan Krell
© 2010

Comments are welcome. This article is not intended to provide nor should it be relied upon for legal and financial advice. Using this article without permission is a violation of copyright laws.

Will home buyer tax credit replace mortgage interest deduction?

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 corroborated 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