Should the mortgage interest tax deduction (MID) become a casualty of the fiscal cliff?
- No, the MID is sacred for good reason! (79%, 253 Votes)
- Yes, this sacred cow needs to go! (21%, 66 Votes)
Total Voters: 319
Will the mortgage interest tax deduction (MID) become a casualty of future deficit reductions?
Tax talks
The words “fiscal cliff” are now firmly entrenched in our national lexicon. One cannot turn on the television without meeting a barrage of doomsday rhetoric and tales of deeply partisan political squabbling.
The two rails of the debate are revenue and spending. The discussion of revenue typically concerns tax rates. More specifically, whether the Bush-era cuts ought to be allowed to:
- expire and jump up for the wealthy and extended for the middle and low class; or
- stay in place,keeping rates low across the board simply for the sake of low rates.
While rates are up for discussion on the front porch of Capitol Hill, a much more sinister conversation is taking place out back: whether or not to reform the mortgage interest tax deduction (MID) to generate more revenue without raising tax rates.
Yes. This discussion must be kept hush hush. For the MID has arguably become the third rail of American politics, proudly usurping the once sacred cow of social security. And the MID’s greatest champion? Housing ideologue par excellence: the National Association of Realtors (NAR).
The eventual fate of the MID largely depends on the rhetorical space it occupies in the collective imagination.
- Is it sacred, signifying all that is right and good about the American dream?
- Is it an outdated policy that disproportionately favors the rich?
- Must it remain untouched and sacrosanct?
- Or ought it be reformed and possibly even eliminated?
Related articles:
The home mortgage tax deduction: inducing debt and stifling mobility
New York Times: Mortgage interest deduction, once a sacred cow, is under scrutiny
Call it what you will
It’s a tax break. No, it’s a subsidy. It’s a government-sponsored program. No, it means less government involvement in our lives.
What people call the MID largely depends on which side of the political divide they fall. For liberal democrats, the MID is clearly a government-funded housing subsidy.
For conservative republicans, the MID means less taxation, thus limited government. This is one reason why the MID has become a sacred cow of American politics and housing policy: it simultaneously fits squarely into seemingly opposite ideological holes.
Related article:
Losing the deduction would be disastrous, according to a NAR spokesman. Total home equity, what little is left, would be vanquished up to 15%. As a result of the perceived negative equity tsunami, NAR goes on to estimate a loss of nearly 300,000 jobs between those working directly in the housing industry and those industries dependent on housing’s success.
Would sending the MID over the cliff result in financial Armageddon, catalyzing another vicious real estate market cycle and vaporizing housing wealth and jobs? Will families stop buying homes?
We think not.
The real numbers
Currently, owners of both first and second homes financed up to $1,100,000 are able to write off the full amount of their mortgage interest as determined by their tax bracket.
For example, a homeowner in the high 35% tax bracket would realize an annual tax savings of $350 on every $1,000 of mortgage interest paid.
The Administration’s proposal includes capping the deduction at the 28% tax rate. Let us repeat: the proposal is a cap, not an elimination of the deduction.
Capping the MID deduction at 28% would mean that the top earners in the country, paying at the 33% and 35% tax brackets, would be limited in their MID at the 28% rate. Thus, a savings of $280 for every $1,000 in interest paid would be realized.
According to the Treasury Department, capping deductions at the 28% rate would result in $584 billion in additional revenue over the next 10 years. This is quite a bit of revenue to be generated from the top 2% of the wealthiest earners, and only by slightly limiting their deduction.
There are other ways to gently milk this sacred cow. In addition to the uber-rich, owners of second homes benefit disproportionally from the interest write off. This aspect of the policy decidedly undercuts the notion of the MID encouraging home ownership and the growth of the middle class. Rather, it is a policy that unabashedly supports the rich getting richer.
The other possibility is to limit deductions to a finite dollar amount. This would purportedly include the MID in addition to deductions on charitable giving and perhaps even medical expenses. It’s difficult to say how exactly this would affect different income earners across the country since no specifics have been given on where the cap will be placed or to which deductions it would definitively apply.
Related article:
The Washington Post: ‘Fiscal cliff’ talks may jeopardize tax deductions and home values
Sinking ships and fiscal cliffs
We like to think of the looming fiscal disaster more as a sinking ship, rather than a fiscal cliff. In order to keep afloat, some baggage is going to have to be jettisoned. Of all the baggage our tax code carries, the MID is the most expendable.
Dramatically reforming or even eliminating it will make the most positive impact on the overall health of the real estate market. Other nations, such as Canada, England and Australia, have all long since eliminated their MID — homeownership rates did not plummet and pricing did not implode. In fact, most all of the developed first world does not depend on deductable mortgage interest to keep their housing markets afloat.
Why is it then that in the face of all rhyme and reason the good old U.S. of A continues to be the remaining stalwart holdout? It’s easy to argue that homeowners are addicted to the MID. They are dependent on the vital tax savings to use for disposable income, thus keeping the wheels of our consumer economy turning. So the thinking goes.
But in actuality, most homeowners either do not itemize (thus do not benefit from the MID) or have such relatively low value mortgages (and tax bracket rates) that the real savings is de minimis. By far the lion’s share of savings goes to the rich and the few.
In truth, as we have shown time and again, the MID is a subsidy for lenders and builders. It’s a pass-through with the only effect being to inflate home prices. This pads the pockets of industry professionals as loan amounts become ever more bloated in order to get the maximum benefit.
Doomsday cometh
The Obama Administration is seeking $1.6 trillion dollars in additional revenue over the next 10 years. The other side of the aisle has agreed, so far, to half that for deficient reduction. Even if the Right capitulates to the Administration’s proposal of raising rates on the top 2%, doing so would only capture about $500 billion in revenue.
This necessarily means that raising rates on their own choir members will not meet either side’s goals in generating new revenues.
Thus, do not kid yourselves — the MID is no longer as sacred as it once was. As one of the largest deductions on the books, these desperate fiscal times just may require sending this once sacred cow to the slaughterhouse.
Related article:
New York Times: Tax arithmetic shows top rate is just a starter
In many states local governments would go bankrupt and default on Municipal Bonds dependent on property taxes if property values plummet—because Congress sharply cut back or eliminated MID. Loss of property taxes, construction and related real estate professional jobs would result dwarfing any increase in federal taxes that result eliminating MID.
Good point George, but you’re a moron with that approach to the illegal issue. If you misspelled “throw”. As serious a problem as immigration may be, it’s not the reason the country is bankrupt! One of the greatest deficiencies in our culture is: people’s inability to start a conversation free of making stupid statements–it weakens your position immediately.
Comments here should be concise. No one cares to read the long winded rants of the moderately informed.
Observe: it is not that washington takes in too little, it spends too much. Particularly on things it was never constitutionally charged with; namely, massive entitlements to too many people with their hands out or a “good” excuse. The Informed & rational must not feed the drug to the addict!
Happy reading!
Keep family farms family farms. Lowering the estate tax exemption to one million will end many family farms. There is not enough income there, especially in high value areas, to pay outrageous estate taxes, which used to start at 1%. There should be sweat equity credit.
Any person that pays over 30% taxes in fed/state combined is NOT doing proper tax planning or is stupid.
I get audited every 2 years because the IRS says: Wow…. all these assets and no/low income? I do market timing and IRC 1031 transactions vs. let my Assets Erode via IRS costs… Taxes are a cost, and if you don’t plan correctly, then you should pay taxes.
Sounds like everyone is whining about the MID without analyzing just what it was originally designed to do – promote MODEST home ownership by giving a tax break (AKA subsidy) to those families who were struggling to acquire and maintain a personal family residence.
The MID just like all other government pork barrels has morphed into a joke – mega mansions, mega motor homes, lake front vacation homes (rarely used and often rented for cash to “personal contacts” , live-aboard yachts, ETC.
Why not make it simple – the max amount of interest that can be deducted is based on 80% of the median home price at the median average FNMA/FHLMC interest rate for the tax year. This is similar to the formula used in calculating the mileage deduction for business use of a personal vehicle.
The middle class will continue to benefit, realtors will continue to sell (sorry about those “elite providers to the rich and famous” (the truly rich and famous pay cash anyways), and builders will continue to build “normal” homes.
As far as self-employed people not being able to qualify for real estate loans – the reason is because THEY DO NOT REPORT ALL OF THEIR INCOME, while those Americans who unfortunately receive a regular paycheck from a legitimate employer have all income reported and taxes deducted, thereby subsidizing the life style of the self-employed.
The qualifications are the same for both – DSR is based on all verifiable (AKA reported) income.
It is unbelievable that the politicians would even consider the MID at a time when the housing market is suffering. Lets pick on Wall Street instead.
To the first comment: NAR isn’t lying to you or omitting that part in their communication to you. Sounds like your Senator’s aide had a good time explaining the wrong thing to you (California Democrat). The latest compromise being floated is capping the 35% writeoff (top tax bracket) to the max you’d get at 28% (that part of the article is somewhat current). You might want to call NAR and confirm before badmouthing their approach. Working in SF, your bread and butter clients are at that threshold anyway.
As to the information in the article:
You can always tell what bias the author has when they use the phraseology ‘savings over 10 years.’ That “$584 billion savings” over ten years is more like $50 Billion or less a year (they always use 10 years because they can inject inflation into the value and the savings on phantom lost revenue due to the 39.6% projected top tax bracket).
The revenue loss for the MID last year was $131 billion. Do the math. There aren’t enough people taking the deduction in the top tax brackets to save anywhere near that $50 Billion amount. That type of savings involves cutting right through the middle class and the lower brackets. The same folks who use the deduction to get better schools, move closer to work, and don’t want to be tenants the rest of their lives. Your average American.
The article (like the last one) fails to consider the contribution the housing sector has on GDP. That number would be $2 Trillion per year. Cut back on the MID and you’ll see the current market flatten because moving up has less attractiveness and value. Take away the move up market and people stay in their existing home. New construction is already years behind population growth in California. What’s coming? Apartments and rentals. That’s what happens when you cut back or eliminate the MID.
Lastly: That $584 billion savings is a red herring. What will really happen to tax revenue with a stunted housing market?
This is too simple, if only everyone didn’t think it they were too clever for the rest of us – here’s a re-work of the tax code –
No deduction, for any purpose, shall be made available to anyone that is not available to everyone regardless of income level, type or status. And I don’t mean that when you get rich you get to take the deduction. No child care tax credits, no mortgage interest tax deductions, no deducting business losses from personal tax returns, noe of that nonsense. The GD MID is only for 65% of American’ that own homes, the rest of the citizenry just get jacked.
The tax system, whose sole purpose should be the funding of the basic goods, products and services, should not be what it’s trying to become – a system of rewards and punishments.
I agree with Mike on the need to cut the US warfare spending, which neither major political party wants to talk about. The US can’t afford to police the world any more than it can afford the costs of ever-growing entitlements, and only the Fed’s money printing exercises are papering over the ugly facts. If interest rates were to be set by market forces instead of the Fed, there wouldn’t even be enough revenue to pay the interest on the existing debt, let alone fund all the other spending the politicians have promised to do.
I am really tired of this debate centering around mortgage deductions, reduction in aid to the least fortunate and attempts to dismantle medicare and medicaid. The real elephant in the room is DEFENSE Expenditures.
You know those horrible catastrophic cuts that would cause the ruination of the Pentagon if we go off the fiscal cliff? They would be approximately 55 billion per year in cuts to the base budget starting 2013. Coincidentally, the amount saved by eliminating the mortgage deduction.
What no one is mentioning is that this is still a military budget that spends MORE than than in 2006, at the height of the Iraq war, and more than we spent on average at the end of the Cold War and during the first Gulf war. Moreover, the United States will still account for 40% of the world’s military expenditures. These cuts come after 13 straight years of defense increases, which brought defense spending to levels not seen since World War II.
Are those hyperventilating about sequestration really claiming that we wouldn’t be able to provide for national security? This cut is to the “base Budget”, and does not include BILLIONS in “other” funding.
Defense spending is out of control. The US spends more on defense than the next 14 countries combined. Our number one enemy today lives in caves and uses the most non-technological weapons available.
Does anyone see the disconnect here?
At the constant encouragement of NAR I sent in the NAR’s objection to eliminating the MID to my senator and representative. The senator replied saying the elimination of the MID only applies to singles who earn $200,000 and couples who earn $250,000 per year. Strange how the NAR left that part off when the sent me their encouraging emails. They did not mention a word about caps either. Moral of the story: The NAR does what it takes to justify their own existence. I discontinued my membership because I don’t believe the world will to come to end if the MID for high income earners will be eliminated.