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?
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- Is it an outdated policy that disproportionately favors the rich?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?
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.
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.
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.
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.