After much hype about the possibility of an elimination of the mortgage interest deduction (MID) as part of the debt ceiling agreement, the August 2nd accord included no such provision.
However, the new law does call for major deficit reductions – $2.4 trillion total – to go into place over the next several years. A $917 billion reduction over the next 10 years is automatic. An additional $1.5 trillion reduction must be decided by November 23rd.
The bipartisan committee dedicated to determining those cuts could find the MID an easy target.
The tax deduction, which has been in place since 1913, is a point of controversy amongst industry and economic authorities.
The MID allows homeowners who file itemized tax deductions to deduct the interest of their mortgage debt up to $1 million.
According to the Treasury and the Joint Committee the cost of the MID this year is $100 billion.
This is about twice the size of the budget request for the Department of Housing and Urban Development, meaning it is twice as big as all the nation’s other housing programs combined, noted Seth Hanlon, Director of Fiscal Policy,
Center for American Progress at a forum hosted by the Tax Policy Center. (The forum took place prior to the debt ceiling decision August 2.)
In fact, Hanlon says the MID should “be looked at through the prism of a spending program.”
Hanlon also stated evidence that the majority of benefits incurred by the MID are by wealthier homeowners with larger mortgage loans.
Another speaker at the forum, Dean Stansel, ajunct fellow at the Reason Foundation, agreed taht the MID benefits those with higher incomes.
In fact, “75 percent of taxpayers don’t benefit from this at all,” Stansel stated.
If part of the goal of the MID is to encourage homeownership – as many proponents claim – then it is being misdirected, according to Hanlon.
For example, the deduction is allowed on second homes and vacation homes. It can also be applied to home equity debt.
“If you look closely at the MID and ask ourselves the question: are we doing it in the most effective way? I think clearly the answer is no,” Hanlon said.
While Hanlon does not necessarily support eliminating the MID, he is in favor of reforming it.
“Keeping it in its current form or eliminating it tomorrow are not the only two options, and there’s a huge range of options in between that we can and should be looking at,” Hanlon stated.
While Hanlon casts the MID as a government expenditure, the National Association of Realtors’ chief economist Lawrence Yun disagrees and says most Americans would view eliminating the reduction as a tax increase.
“It’s a tax increase; it is not a reduction in government spending,” Yun said at the Rethinking the Mortgage Interest Deduction forum.
Regardless, Yun said, “It’s the worst possible time to discuss [the MID] because the fragility of the housing market. And Ben Bernake clearly laid out that without the housing market recovery, that economic recovery would be very lackluster.”