Balancing Act: House Committee Hears Opposing Viewpoints Over Mortgage Interest Rate Deduction

By Gretchen Wegrich

The House Ways and Means Committee oversaw a lengthy debate today over housing tax incentives. Testimony was given by key industry players in the housing, building and real estate sectors as well as policy experts, who represented both sides of the controversy over the mortgage interest deduction (MID) tax deductions for property taxes, as well as the real estate capital gains exemption and low income tax credit.

“Home building is an industry dominated by small businesses, so the idea of simplifying the complicated tax rules related to business has great appeal,” said Robert Dietz, assistant vice president of the National Association of Home Builders (NAHB).

“At the same time,” Dietz continued, “Our industry remembers painful lessons from the 1986 Tax Reform Act, when the commercial and multifamily sectors experienced a downturn due to unintended consequences. Moreover, when housing fares well, it spurs job and economic growth.”

Dietz spoke out in favor of continuing the Low Income Housing Tax Credit, explaining that 70 percent of homeowners with a mortgage claimed the tax deduction in 2009.

“Among all homeowners who have ever held a mortgage, the vast majority have claimed the home mortgage interest deduction for years at a time,” Dietz added.

The home loan interest deduction greatly benefits younger homeowners, those 35 and under, who receive the largest deductions as a share of household income. The benefit of the home loan interest deduction is significant for younger homeowners, who typically have less equity, more constricted household budgets, and must support a growing family.

"Given this demographic connection, NAHB believes that any policy change that makes it harder to buy a home, or forces young families to defer home purchases, will have a significant impact on wealth accumulation and the makeup of the middle class," said Dietz

Repealing the deduction for second homes would unjustly penalize many homeowners who move from their homes and purchase a new home within the same year, argued Diaz, explaining that the impact would be felt in the economy through lost home sales, home construction and local tax revenues.

There are several proposals circulating that offer alternatives to the mortgage income deduction tax deduction.

Eliminating the MID entirely would raise taxes by $696 per household by 2022. Taxpayers in the upper tax brackets would see a larger increase, while lower brackets would feel the impact much less.

A second proposal suggests capping the deduction at the first $500,000 of home debt, raising taxes by an average of $84 per household. Taxpayers in the 80^th to 90^th percentile would see the greatest increases, while the bottom four quintiles would feel little impact. Young homeowners in high cost housing areas with high incomes who had not paid down mortgage debt would be hardest hit by the deduction cap.

More complex alternatives would involve replacing the MID with a 15 percent refundable credit and capping interest deductions or replacing the MID with a 20 percent nonrefundable credit and capping eligible debt at $500,000.

Eric Toder, Co-Director of the Urban-Brookings Tax Policy Center (TPC) said paring back the MID could have unanticipated effects on housing prices. Research on this topic has been inconclusive.

Mark A Calabria, Director of Financial Regulation Studies at the Cato Institute, said changes to the tax code would have a positive effect on economic growth and affordability if the new code offered low, simple flat rates and few deductions.  

Gretchen Wegrich

Gretchen Wegrich is an editor at Lender411. She specializes in mortgage basics, personal finance and green living. She graduated with a bachelor's degree in writing from University of California, San Diego and previously worked at the Santa Cruz Sentinel. Contact her at gretchen@lender411com.