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For decades the mortgage interest tax deduction has rewarded homeowners at the expense of other taxpayers, but with the 2017 tax reform, much of the benefit for homeowners was eliminated. Most middle class homeowners achieved better tax results by taking the standard deduction, bringing the percentage of taxpayers using the mortgage interest tax deduction down from 21% in 2017 to only 8% in 2018. At Bloomberg, Karl W. Smith suggests the deduction should be eliminated entirely. He writes:
After 1986, when Congress eliminated the deductibility of interest on personal loans and increased the size of the standard deduction, the mortgage interest deduction was on life support. Add in the factor of declining interest rates, and the deduction was nearly useless for the vast majority of taxpayers.
The National Association of Realtors responded with a media campaignwarning Americans that any effort to cut the deduction would mean the end of the American Dream. Congress abandoned the effort. Over time, home prices have steadily risen, and the deduction has become enshrined as an untouchable middle-class benefit.
Even the 2017 effort was a compromise. House Republicans wanted to cap the benefit at the first $500,000 of a mortgage balance. The Senate raised the cap to $750,000 and grandfathered in existing homeowners.
The $750,000 limit was set so that the deduction would hit primarily the jumbo mortgage market. At the time, one prominent study estimated that only 14% of taxpayers would find it worthwhile to claim the deduction.
Yet as the New York Times reports, citing IRS data, only 8% of taxpayers claimed the deduction in 2018, compared to 21% in 2017. Even more important, the percentage of taxpayers earning $100,000 to $200,000 annually who claimed the deduction declined from 61% to 21%. For upper-middle-class families, the mortgage interest deduction went from being a benefit for the majority to one for a minority.
Yet away from the coasts, there has been little price paid — politically or economically. The new law seems to have had only a modest effect on home prices. In San Francisco and New York City, the rise in home prices has slowed, but prices have not fallen as far as the industry predicted.
Nonetheless, the National Association of Realtors is lobbying to weaken the effects of the 2017 tax reforms — even though the evidence shows that the cap is both more effective than proponents hoped and less damaging than opponents feared. Congress should act now to completely eliminate the mortgage interest deduction before the movement to revive it gains any steam.
Read more here.
Jeremy Jones, CFA
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