Oregon homeowners dodged a big bullet late last month [April, 2013], when some at the state legislature sought to deprive them of the mortgage interest deduction [“MID”] on their state tax returns. See, my post here.
However, as long as we permit government to engage in profligate spending, the pols in Congress and the state legislatures will continue to find new ways to feed their tax and spend habit. So while the MID was a sacred cow not that many years ago – it’s been on the books since 1913 when the Code was first passed – today, with governments looking for ways to increase revenue [decreasing spending is apparently not an option – unless it occurs accidentally, like the Sequester], it is at risk of being taken away. So, you can be sure that further attacks on the MID are not far from the minds of those in government whose battle plan depends upon class warfare – just as certain pols depend upon class warfare to remain in office.
So with that in mind, I think it’s high time to understand the MID, which, due to the Great Recession, circa 2007 – 2009, has dropped substantially in terms of the number of tax filers claiming it. The Pew Charitable Trusts has recently published a study titled “The Geographic Distribution of the Mortgage Interest Deduction.” It covers each states’ use of the MID based on a percentage of its population. Herewith, is the study’s brief introductory discussion of issue:
“Research shows links between home ownership and more stable and cohesive neighborhoods, stronger attachment to communities, greater civic participation, and lower rates of crime. For many, the deduction for mortgage interest is associated with the American Dream of home ownership and any benefits that are linked to it. Yet empirical evidence suggests the mortgage interest deduction as currently structured may be ineffective at increasing home ownership rates. Fewer than half of all homeowners and about a quarter of tax filers—claim the mortgage interest deduction. It is available only to homeowners who itemize deductions. For those who do claim the deduction, the benefit increases with the size of the mortgage—the bigger the mortgage, the greater the tax benefit. The benefit also rises with a taxpayer’s marginal tax rate, which, in part, explains why higher-income taxpayers—who likely would buy a house regardless of the tax treatment—receive a disproportionate share of the benefit. As with many tax subsidies designed to encourage specific activities and achieve certain policy goals, the mortgage interest deduction has economic costs. It affects the allocation of capital across the economy: By effectively lowering the price of owner-occupied housing relative to other goods and services, this tax expenditure encourages investment in and consumption of housing over other types of investments, goods, and services. Finally, the deduction results in significant forgone revenue, not just at the federal level but also in states with tax codes that link to this federal tax expenditure. [Underscore mine. PCQ]
The text I underscored above was footnoted in the original text of the study. Two sources were relied up: One in 2003, which I discount by the sheer lapse of time; a decade of differing demographics; a decade of different housing issues; and a decade of wildly different politics. The other study was in 2012, in which the author, a Marquette University professor, stated:
“I find the MID to be responsible for a 10.9 – 18.4 percent increase in the size of home purchased, but that no relationship exists between the MID and home ownership.”
Hmmm. I can hear the new home buyer discussion now: “Let’s see, if the MID stays, we can afford a larger home, but if it goes away, we have to downsize our dreams!” Sorry, Professor, I don’t buy this. You are simply monetizing the financial impact of the lost deduction with the monthly housing cost of the home. But this analysis could be performed on any tax deduction – or any tax hike. If the cigarette tax goes up 50%, does that mean home buyers who smoke will live in smaller homes? I doubt one in a thousand home buyers put a very sharp pencil to their purchasing decision – perhaps they should.
Here’s my take: Half of the home purchase decision is emotional, and the other half consists of a “back of the napkin” calculation of monthly debt service versus net monthly income, with a sprinkle of confidence that the American economy is improving.
Simply because there is a statistical correlation between the MID and home size does not mean the former “caused” the latter. Those using the MID itemize their deductions. Only about 30% of taxpayers do so. While there are several exceptions, folks that itemize generally have more annual income [and deductible expenses] than those who do not. If they have more income, it should come as no surprise that they own homes somewhat larger than tax filers using standard deductions.
This fellow in the ivory tower went on to opine that:
“A major criticism of this tax expenditure, and of the MID as a policy in general, is that it encourages excessive purchase of housing.”
Excessive?! Do I have this right? A tax deduction that’s been on the books since 1913 and was designed and intended to encourage home purchasing is now being called “excessive”? I think this guy’s “research” stinks – I wonder what Pew would say?
What will become of the MID? I suspect the answer will be divided down political and industry lines. And speaking of industries, here’s a good link to the NAR®’s Field Guide to the Mortgage Interest Deduction. It tells the real story. ~ PCQ
