Midyear Legislative Meetings & Trade Expo - The Mortgage Interest Deduction and Tax Reform
The mortgage interest deduction (MID) has been part of the tax code since its 1913 inception. In those simpler times, the theory was that individuals would pay the interest on mortgages (but not the tax) and that the bank (originally a “building society” or savings and loan association) would pay tax on the interest income it earned from the mortgages paid.
People don’t buy homes becauseof the MID. They buy homes to satisfy many social, family and personal goals. The MID doeshowever, facilitate homeownership because it has the effect of reducing the carrying costs of ownership. Homeownership is the cornerstone of a healthy community, the basis for positive community involvement and a family’s first step on the ladder to wealth.
A home purchase — the largest investment most families will ever make — builds family wealth, provides tax revenues for local governments and stimulates growth in all housing-related industries. Over the past several decades, about fifteen to eighteen percent of Gross Domestic Product is associated with homeownership. Thus, homeownership is hardly a special interest: it is the common interest.
More than 60 percent of the families who claim the mortgage interest deduction have household incomes between $60,000 and $200,000. If the current law deduction were changed to a 15% tax credit, more than one-third of them would experience a tax increase as compared with current law.
While in any particular year only about one-third of taxpayers itemize, of the taxpayers who doitemize deductions, more than 60% utilize the MID. (Homeowners who do not itemize include those whose total deductions are less than the standard deduction and those whose mortgages have been paid off.)
Over time, more than one-third of taxpayers will receive the benefit of the MID. In any particular year the identity of particular itemizers will vary because their financial situations change, changing the composition of their tax returns. For example, a taxpayer who has recently purchased a new home might be more likely to itemize than a retired person who has had the same residence for many years.
Many people do not itemize because the standard deduction results in a lower tax bill than an itemized return. Arguably, taxpayers who are homeowners and utilize the standard deduction in lieu of itemizing are actually receiving a greater tax benefit (in relative terms) than those who itemize. Thus, the standard deduction provides an important simplification benefit for many individuals.
Despite dramatic growth in homeownership, a gap persists between the homeownership rates of Caucasian Americans as compared with African Americans, Hispanics and other minority groups. Eliminating or reducing the MID would cause homeownership rates to drop and would exacerbate this ownership gap. In recent years, the largest share of first-time homebuyers has come from minority groups. This is a trend that should continue. Changes to the MID could erode our progress.
Some economists believe that if less money was invested in owner-occupied housing, more money would be invested in "productive" assets such as stocks and equipment. We are aware of no evidence showing that owning these financial assets can provide the foundation for community life, lead to the development of quality public schools, foster lower crime rates or contribute to the tax base of the local government. The purchase of a home symbolizes an investment in the future and a commitment to a community in ways that no other asset can.
Related Resources:
Defending the Mortgage Interest Deduction
NAR's Background Paper on Tax Reform
Recommendations of the President's Advisory Panel on Tax Reform
