The Realtors Take a Tax Hostage
Republicans had hoped to mute opposition to their tax blueprint by preserving the deduction for mortgage interest, but no bad policy goes unpunished. The Realtors are still howling that the reform will hurt homeowners, and they’re trying to take a central element of reform as a political hostage.
One goal of the GOP framework is to simplify the tax code by eliminating preferences that distort economic behavior. Most itemized deductions other than mortgage interest and charitable contributions would be nixed. But the individual standard deduction would increase to $12,000 from $6,350 ($24,000 for married couples) to reduce taxes for most Americans.
The Realtors are upset because they say this middle-class tax cut would make fewer taxpayers use the mortgage-interest deduction. The National Association of Realtors trashed the framework in a statement, saying it “would all but nullify the incentive to purchase a home for most, amounting to a de facto tax increase” and ensure “that only the top 5 percent of Americans have the opportunity to benefit from the mortgage interest deduction.”
Where to begin? The brokers are right that the reforms would reduce the utility of the mortgage-interest deduction for many middle-income earners who currently itemize. But this is a virtue, not a bug. While only those with large mortgages and charitable contributions would likely continue to benefit from the break, this doesn’t mean other homeowners would be worse off.
Two-thirds of all income-tax filers already take the standard deduction. Increasing it to $12,000 would mainly affect homeowners earning between $50,000 and $100,000 who on average itemize $7,000 in mortgage interest and $6,342 in local and state taxes. Some of these middle-income itemizers—particularly those with smaller mortgages who live in lower-tax states—would instead take the standard deduction. But if their overall tax liability is reduced, they’re still better off. The Realtors want to keep taxes higher on all Americans so they can keep their subsidy.
The well-to-do with large mortgages could still itemize deductions—the average mortgage-interest deduction for those earning more than $250,000 is $15,500—but the subsidy’s value would diminish due to a decline in marginal tax rates. But that is also the point of reform—to lower rates across the board rather than subsidize one form of economic or social behavior (like owning a home) over another.
The Realtors say the GOP framework would reduce the incentive to buy and own homes. This is highly doubtful. Home-ownership is higher in countries with no deduction such as Canada (69%) and the United Kingdom (71%) than in the U.S. (64%). The U.S. also heavily subsidizes housing in other ways, such as the low-income housing tax credit and Fannie Mae and Federal Housing Administration loan guarantees.
The subsidies get baked into higher home prices, thereby making ownership lessaffordable for lower- and middle-income earners. California, Washington, D.C., New York and Hawaii have among the largest mortgage-interest tax deduction claims per return but the lowest home-ownership rates. On the other hand, taxpayers in Southern and Midwestern states with high home-ownership derive less benefit from the deduction.
Taxpayers in coastal states that benefit most from the state and local tax break also reap some of the biggest gains from the mortgage-interest deduction. Many of these states have higher home prices due to scarcity of land and restrictive zoning. Homes in California’s coastal metros are four to five times more expensive than in most of the rest of the country, but the disparity in rents is about half as large.
This is another way of saying that the mortgage-interest deduction subsidizes housing consumption for the upper and upper-middle class. Republicans could help tax fairness if they reduced the current $1 million cap on the size of a deductible loan to $500,000. The Tax Foundation estimates this would raise about $300 billion in revenue over 10 years, which could be used to lower tax rates. GOP tax writers should do this if the Realtors insist on partially restoring the state and local tax deduction.
Like other carve-outs, the mortgage-interest deduction favors some taxpayers over others and distorts economic decisions. Tax reform would benefit all Americans in lower rates and faster economic growth, and Republicans should hold fast against the housing lobby’s self-serving tax flimflam.