Two years ago, the mortgage interest tax deduction (MID) cost the U.S. government $83 billion. In 2010:

  • 78% of the $83 billion MID went to households with incomes over $100,000;
  • 35% of the MID went to households with incomes over $200,000; and
  • the average deduction for households with incomes over $200,000 was $3,916 more than the average deduction of all U.S. households.

This year, the MID cost the U.S. government $100 billion.

Though one of the United States’ most popular tax deductions, the MID has its share of critics. Those opposed to the MID argue it inflates home prices and disproportionately benefits the wealthy.

Congress is currently contemplating proposals to reform the MID, including:

  • cutting the maximum principal amount in half, from $1 million to $500,000;
  • eliminating eligibility for second homes; and
  • converting the deduction to a tax credit, capped at 12% of the amount of interest paid.

MID supporters fear home prices will drop if Congress adopts these proposals. Buyers’ purchasing power will decrease if they are unable to write off interest payments.

A recent poll by Quinnipiac University showed two-thirds of respondents were opposed to eliminating the MID completely.

first tuesday insight

The loudest protesters against MID reform champion it as a homeownership incentive.

However, the MID does not enable Average Joe to buy a house. It enables him to buy more house.

Home prices will decrease without the MID. State and national homeownership rates will not.

As it is, the MID does not foster a social ideal. It simply inflates home prices, baiting homebuyers to overextend their finances with the promise of a partial rebate of their monthly payments.

The calf is fat. If Congress won’t kill it outright, they should at least divvy its rations with more discretion.

What do first tuesday readers think? Of the 237 readers who participated in our June 2012 poll, 83% (196 voters) asserted mortgage interest deductions increase California home sales.

Make your voice heard in our latest MID Reader Poll.

Related article:

Sending a sacred cow off the fiscal cliff: the MID

Re: “Long-treasured mortgage interest deduction may face changes” from The Los Angeles Times