This week, as my family enjoys a vacation on Cape Cod, its bay lapping beneath our rented hilltop cottage, I find myself pondering the mortgage interest deduction.
Before you click the back button to tune in to On Point, let me assure you I won’t pass up a day of swimming to pore over the family tax returns. The deduction intrudes on my Cape reverie because the law lets Americans claim it on first and second homes, meaning people affluent enough to own those oceanfront vacation abodes get this break.
That makes the tax code a bully kicking sand in the face of struggling Americans. Expected to cost the Treasury $96 billion in foregone revenue by 2019, deducting mortgage interest “may very well be the most regressive piece of social policy in America.”
So concludes a lengthy article in The New York Times Magazine, the headline for which called home owning “the engine of American inequality.” You could find less enlightening beach reading.
Enacted with the income tax in 1913, at a time when most Americans rented, the deduction mushroomed in cost and political sacredness after World War II, as Uncle Sam replaced home renters with homeowners through programs like the GI Bill’s housing assistance.
Sounds like the American dream come true, doesn’t it? So why did one pundit lump the deduction in with “welfare for golfers,” referring to a goofy California tax break for fairways?
First, the value of the deduction increases as one’s mortgage increases — and bigger mortgages are taken out by higher earners. And to claim the deduction, you have to itemize, a pastime of more affluent taxpayers. Bottom line: More than four-fifths of the total value of mortgage deductions go to households with incomes of six figures or more, according to the magazine.
That’s welfare skewed toward the well-off, made all the more galling by those beneficiaries who demonize supposed moochers among the poor. “A 15-story public housing tower and a mortgaged suburban home are both government-subsidized, but only one looks (and feels) that way,” the Times writer noted.
Add in the fact that a person who earns too much to be eligible for public housing but too little to buy a home must rent. There’s no taxpayer subsidy to help with that, even though the net worth of the average homeowner ($195,400, the magazine says) dwarfs that of the average renter ($5,400).
Don’t tell me that this tax break is the only way to build a nation of homeowners. That’s disproven by a gaze northward toward Canada, one of several countries with higher home owning rates than ours, and which don’t permit their citizens to deduct mortgage interest.
A 2002 Harvard study suggested that the well-off who are the lion’s share of beneficiaries from the deduction would be homeowners even without it. So reining it in, economists say, would cause a drop in housing prices but not a market collapse.
Yes, my family profits from deducting the mortgage interest on our condo. Since we and homeowners across the country factored the tax impact into our buying decisions, and as the deduction helps support housing values, lawmakers couldn’t just yank it away. If we lived in a rational world, we’d phase it out, gradually but completely.
Realistically, though, given the deduction’s popularity and the real estate industry’s lobbying clout, any reform will have to settle for curtailing rather than killing the break. Interest deductions should only be permitted on primary residences, and even then, the mortgage level eligible for the deduction should be capped at less than the current $1 million limit. Halving that amount, the magazine reports, could save $87 billion over a decade. (The cap is $100,000 for second homes.)
The deduction is one of many loopholes that needlessly muck up the tax code, giving taxpayers migraines every April 15, suckling a make-work industry of tax lawyers and preparers, and stripping the government of revenue that could be put towards reducing inequality rather than promoting it. Reducing the deficit would also be a worthier use of the taxpayer’s dime.
Reforming the mortgage interest deduction by itself won’t solve our hapless tax code or American poverty. But pulling the plug on this engine of inequality would be a good start.