Why the Mortgage Interest Tax Deduction Has Got to Go

The mortgage interest deduction costs the federal government much more than rental assistance for low-income people.
The mortgage interest deduction costs the federal government much more than rental assistance for low-income people.

While the Trump administration pursues massive cuts to HUD that threaten urban neighborhoods, especially poorer ones, there’s one form of housing assistance that the White House is much less enthusiastic about reducing: the mortgage interest tax deduction.

The mortgage interest deduction costs the federal government more than all rental subsidies combined, writes David Meni at Greater Greater Washington. And all that money promotes sprawl by encouraging people to buy more house, while transferring wealth to the upper tiers of the income ladder.

While there is bi-partisan support among think tanks for reforming this tax break, the politics of overhauling such a massive giveaway to the affluent are exceptionally difficult. Meni breaks down why the mortgage interest deduction is so regressive:

The MID is currently projected to be a $96 billion program by 2019. And as we recapped in that earlier post, nearly all of that spending goes to high-earners with large mortgages.

This staggering inequity is because of how the benefit is designed. You can only claim the deduction if you itemize your expenses, something that only those with higher incomes tend to do. As a result, the value of the benefit actually goes up as your income rises. This means that the MID actually incentives mortgage debt, rather than homeownership — you get a larger benefit if you have a more expensive mortgage.

As a result of all these policy design choices, someone making millions of dollars a year — even if they have multiple homes — gets an average of $1,236 per month from the MID. That could cover most or all of a month’s rent for low-income households, whose average share is just eight cents, if they can get the benefit at all.

For someone with a $1 million mortgage, the MID means that the federal government gives you back about $22,000 a year — enough to push a family of three above the poverty line.

More recommended reading today: Streets.mn says the focus on “distracted walking” is a distraction from the real threats that make walking so dangerous. And Bike Portland reports on some good news from Oregon state legislature which should clear the way for a 20 mph default residential speed limit in the city.

  • mckillio

    This deduction needs to go away immediately on non-primary residence mortgages and should be discontinued on all new mortgages.

  • com63

    They should phase it out over a long period like say 30 years to make it more politically palatable. This year you can deduct 100%, next year 97%, the following year 94% etc.

  • kevd

    The MID definitely needs drastic changing.
    Simply eliminating it is a non-starter though, because so many people have determined the affordability of their homes by taking it into account.
    First step should be eliminating it for second homes.
    Then capping it.

  • Vooch

    sorry

    raising taxes isn’t going to be a winner

  • Pat

    The MID helps people who own condos too.

    One place to start would be FHA loans. FHA loans definitely encourage sprawl as the requirements for an FHA loan on a condo are stricter than say a SFR. Perhaps providing better lending terms for more sustainable housing would be a way to slow sprawl.

  • Larry Littlefield

    The deduction allows people to pay more given their income, and therefore causes (younger) buyers to bid up the price of housing to the benefit of (older) sellers and those holding their mortgages. That is the unsaid.

    A few decades ago when those older sellers were buying, moreover, “conforming” mortgages eligible to be securitized by Fannie Mae and Freddie Mac had buyers’ total debt payments limited to 30 percent of their stable income. That kept housing prices in line relative to incomes. So that younger buyers could pay sellers more despite their lower incomes relative to past generations, that has been increased to 45 percent. More unsaid.

    Younger people are getting robbed. The whole government is pushing them into a lifetime of debt servitude to keep Generation Greed’s consumption party going a little longer.

    https://www.washingtonpost.com/realestate/as-equity-rises-many-homeowners-use-refinancings-to-free-up-cash/2017/04/11/edf83d8e-1e19-11e7-a0a7-8b2a45e3dc84_story.html?utm_term=.c74b0ab0aae3

    Yet another set of policies that works the same as all the others. I’ll say it again — don’t buy until it hurts to sell, with a housing cost so low relative to income that it takes back those collective financial disadvantages foisted on those younger by Generation Greed.

    https://larrylittlefield.wordpress.com/2014/08/24/repost-how-then-shall-we-live-housing-in-the-wake-of-generation-greed/

  • redbike

    An overarching question:

    How many taxpayers who are eligible for the mortgage interest tax deduction don’t take it because they take the standard deduction instead? (You can’t double-dip.)

  • Larry Littlefield

    Our choices after a 35-year party are big increases in taxes or big reductions in government services and benefits.
    Or perhaps our choice is big increases in taxes AND big reductions in government services and benefits.
    Under the circumstances, deals like this should be among the first to go.

  • Vooch

    larry,

    sorry to disagree but we could reduce the state to 1/7 of its current size and most regular Americans would hardly notice.

    The entire state at all levels consumed less than 7% of GDP in 1912. Americans had public schools, police, courts, a multimodal transport system, and all the attributes of modern life.

    it’s possible

  • Larry Littlefield

    http://www.crainsnewyork.com/article/20170416/BLOGS01/170419914/cuomos-421-a-tax-break-for-builders-might-be-irrelevant-to

    “The problem is that the rental market is weakening. Bloomberg News has chronicled the slide in expensive luxury rentals. Less expensive units are languishing, too, and rents are dropping…The common theme seems to be
    that builders have misjudged the incomes of the millennials who have flooded to
    big cities for jobs in the so-called creative economy. These young people
    simply can’t afford the rents, and the impact is spreading from New York to
    other thriving cities.”

    So how can they afford inflated for-sale prices? The government is borrowing money THEY will have to pay back to try to force them to pay more for owner-occupied housing, through the MID and other means.

  • Larry Littlefield

    Health care, senior benefits, the needy. That’s where it goes, and where it needs to go.

    Back then we had schools but not for the disabled, not in large parts of the country to any degree (the South for example), and not past grade 8 for most.

    Life expectancy was lower (though ours is going down).

    We’ve got more police, prisons, and defense spending now too.
    Perhaps more than is needed. But we had practically no armed forces in 1912. No one is willing to back to that given the world of today.

  • Gary Hardin

    apparently none of you own a home! I am single, retired veteran, living on my SS, which I paid into for 50 years. I own my home, make a monthly payment I can afford, pay my utilities and expenses and travel a little. With a total income around $24000/ year, I use the MID to offset my taxable income so the govt does not take what little I have. And you twits advocate taking that away from me? Who among you wants to send me a check each month to take its place? Spend your time getting rid of the idiots in govt that have screwed things up so bad that we even have to have this discussion! Get a real life!

  • Vooch

    yeah and GDP is 20 times bigger so the same 7% should buy us more of everything.

    Hey instead of 7% let’s double the state of 1912 and shoot for 14%. 2x should be enough to fund a bloated nanny state.

    14% would be 1/3 of today’s state, and still double that of 1912.

    8th grade ? yeah because 8th graders had the same knowledge as 12th graders today 🙂

    go down to chambers street and take a gander at the ginormous ‘new’ city hall funded & built at that time.

    1912 represents a modern fully functioning civilization.

  • mckillio

    I own a primary residence and a rental property. Re-read my comment, it wouldn’t affect you. How long have you owned your home? How much is your MID amount?

  • Larry Littlefield

    In NYC.

    Sounds like you agree with former NY Governor Al Smith, when he opposed the New Deal of his successor FDR. Helped bring some of the government NY already had to the rest of the country.

    Bad as I think things are going to be, I do expect more than we had in 1912. Although Generation Greed might not want us to get even that.

  • John Smith

    Let’s continue to penalize successful people…why can’t ALL people catch a break? Socialism as its best…ridiculous

  • bobfuss

    Over 60% of voters own their own home and have no interest in either paying more tax or in seeing their home values decline. Therefore such a proposal cannot pass, which is why no serious politicians is suggesting it.

    You are engaged in wild fantasies.

  • bobfuss

    Then I will take big reductions in government services. Defense and law enforcement are legitimate services and need to be funded. A few related matters like immigration and air traffic control. But do we really need vast departments to administer welfare? Can we not drastically cut public spending and then actually cut taxes, rather than the idea here of raising them?

  • theqin

    Before 1986 all personal loans including mortgage and credit card debt was tax deductible. This was under the theory that the person loaning out the money was already paying income tax on the interest from the loan, so it was avoiding double taxation.

    As far as claiming that it helps the upper tiers of the the income ladder, at least for bay area residents this is far from true. You can only deduct the interest on the first $1 million value of your home (so if your home is $1.5 million, you can only deduct 2/3 of the interest on your loan). Furthermore for couples with a join income above about $310,000 the deduction is phased out (see https://www.kitces.com/blog/how-the-personal-exemption-phaseout-pep-and-pease-limitation-are-really-just-1-income-surtaxes/ for more details on this complex phase out calculation). Suffice it to say that upper income earners will essentially get no benefit from the mortgage tax deduction, whereas people buying 1 bedroom condos in San Francisco probably get the largest benefit.

  • thielges

    This MID subsidy is shared with the banking and real estate industries. If the MID were to suddenly disappear, banks would have to lower their margins to offset the loss of loan applications caused by the greater cost of home ownership. And banks are unlikely to take up all of the slack, resulting in a lower amount of people who can qualify for a loan. That in turn will place a downward pressure on real estate prices.

    The summary effect will be lower bank profits, fewer homeowners, and lower home prices. So in addition to the resistance from homeowners any law to reduce or curtail the MID will receive strong opposition from the real estate and banking industries.

  • Larry Littlefield

    After 50 years of work you have paid off a mortgage and held a mortgage burning party, right? And if your income is actually $24,000 you don’t itemize, right?

    Just insane.

  • Gary Hardin

    nope. sold one home, made nice profit, paid off debts, moved and put large down on new one. absolutely itemize. I have every year I have owned a home. never had income over $50-75k. I used deductions to put more cash in my pocket and rarely got any refund, but only one time, while self employed have I ever had to send any additional tax. The MID made it possible to have an AGI such that I did not owe any more tax than what I paid out of every pay check and sometimes allowed me a small refund.

  • Chanelle

    I am a single woman under 35…I purchased a home specifically to lower my taxable income because I was getting eaten up in taxes…and that was with zero deductions…if they took the MID away I would struggle to keep my home not only because my take home pay would be lowered significantly but also because I won’t have anything as large as my mortgage interest to offset my taxable income…and I don’t have a large mortgage at all considering where I live…bought my home for $175k…the average starter home in the dc area is around $250k

  • Vooch

    the New Deal was part and parcel of the totalitarian mindset of the period.

    It hurt the working poor the most and extended the Great Depression until 1942.

  • SFnative74

    I’m a middle class homeowner that lives nearly paycheck to paycheck, and if this deduction was removed, I would not be able to afford my home and would have to sell it. Of course, its selling price would drop dramatically as people price the deduction into their budget calculations. So now my family and I have to sell and possibly not be able to cover the remaining mortgage with the proceeds from the sale. Is that what we want to happen? A different approach could be to cap the amount one can deduct, though that should be reflective of the local housing market. An $800,000 mortgage in San Francisco is very common for an average house.

  • John Murphy

    So you want to keep your tiny little MID, thus allowing people with millions of dollars to keep their HUGE MID, thus reducing the ability of the government to fund tihngs like veterans programs.

    Nicely played.

  • John Murphy

    Minor nit – not the first million value of your home, the first $1 millon size of your loan.

  • John Murphy

    I always wonder about this – people buy a home to lower their taxable income. So for every dollar in interest they pay, they get like 25-30 cents back from the government – but that’s still 70-75 cents out of your pocket!

    Getting a deduction is only part of the calculus

  • John Murphy

    “So now my family and I have to sell and possibly not be able to cover the remaining mortgage with the proceeds from the sale.”

    If you own a house in SF, and you are anywhere near to underwater in your mortgage, you’re doing it wrong.

  • bobfuss

    It’s already capped, at a million, which won’t even buy you the average home in San Francisco.

  • bobfuss

    Don’t worry, the voters would never agree to this. Home ownership is widely seen as a highly desirable thing, like saving for retirement and giving to charity, so those tax deductions will remain.

    As far as I can see, the only support for this idea is coming from the minority who are renters, who falsely believe this would somehow magically make homes affordable. And the usual suspect big-government socialists of course.

  • bobfuss

    Because you have to pay for housing anyway. So either you pay, say 2K a month in rent, or you pay 2K a month on a mortgage, save the rent AND get maybe $600 a month back in interest.

  • AndreL

    Streetsblog at it again with utopian proposals that will never see the light of day. The mortgage interest deduction is generally a bad idea, but political realities would not work for its abolition outright.

    It is better to propose more viable changes: no deduction for anything other than a primary residence, and a hard cap on the size of mortgages with deduction available on new mortgages after passing of this hypothetical change. Say, a upper threshold equal to twice the national average residential unit price.

    The average should be national so that regions with overheated real estate markets are not getting further incentives for even higher prices through MID.

  • BlueFairlane

    Vast sections of my home state didn’t even get electricity until a generation after 1912, and they only got it then because of the New Deal. I don’t think we have the same definition of a modern fully functioning civilization.

  • Vooch

    electricity isn’t possible without the benevolent hand of the all powerful state ?

  • kevd

    Noted!

  • Chanelle

    If your purchasing a home you lower your income you have to be smart about it… the average rent in my area is $1200-1300 for a one bedroom… my mortgage on a 4 bedroom townhouse is less than $1200 so I benefit twofold…i get to build equity in a larger home and get the tax benefit

  • bobfuss

    Moreover you could probably rent out a couple of those spare bedrooms if you wanted to, and get others to pay your mortgage for you!

  • Chanelle

    That’s my next project… the basement has it’s own full bedroom and bath so I plan to rent it out eventually

  • John Murphy

    First – where do you live, I want a 4 BR townhouse for $1200 a month. Perhaps you made a large down payment, and your home isn’t only worth 400k or so, but if so you have reduced your tax deduction haven’t you 🙂

    If your interest rate is 3%, your mortgage is probably 300,000. You are making equity, but you also pay probably $3000 per year in property taxes and another $1000 in insurance. You paid $4000 or so in closing costs. As the owner of the home maintainance is on you. If you sell, you are out 5% or so in commissions, and your flexibility in the event you need to move is lower.

    At 3% you are paying $9k per year in mortgage interest. Let’s say you are in the 25% tax bracket, so you save 2300 per year in mortgage interest, less than you pay in property taxes and insurance.

    I’m not saying you’ve made a bad decision, you rightly point out you accrue equity, and there are all sorts of huge financial benefits to ownership, down to simple things like being able to buy furniture that will always fit the space you live. I’m just a math geek on these problems.

    The biggest advantage of ownership is that nobody can evict you, that sort of control is priceless.

  • Jon

    Not to mention you’re also building equity.

  • bobfuss

    Nobody can evict you? Tell that to the millions that got foreclosed on from 2007 onwards.

  • Jon

    Those who’s standard deduction is higher than there actual deductions and those who can’t be bothered to keep track. Neither is a compelling reason to get rid of the mortgage interest deduction.

  • SFnative74

    I’m not at the moment. But if this deduction is removed, current home values will drop significantly.

  • Chanelle

    I live in Maryland about 2 miles from the Washington D.C. line…the original purchase price of my home was $178000…I did FHA so I only put down 3.5% and my interest rate is 4.25% so my original mortgage was $1340 once you included pmi and FHA insurance… after one year of living there I refinanced to a conventional loan with the exact same rate put it knocked off the pmi so my mortgage went down to $1155… since my home owners insurance has gone up my mortgage is now $1186 but still not bad…i will admit I was extremely fortunate to find my home…at the time the county I lived in was renovating homes that had been abandoned and my home was one…the company that did the renovation sold it below market value because they had some many homes in the county they were working on…ive been here 3 years and now my home is worth $240k…i wouldn’t have been able to afford it at that price

  • John Murphy

    Oh well jeez, your mortgage you quoted INCLUDES your insurance? Does it include impounds for your property taxes too?

    Man, I’m moving to Maryland.

  • John Murphy

    In SF? Doubtful, with the prevalence of all cash deals, even if a lot of those deals are quickly followed by a cash out refinance, that’s a function of interest rates, not the deduction.

    With interest rates at 3%, it’s not like people are getting life altering deductions – I kept refinancing down and suddenly realized that I had to start withholding more taxes because my tax deduction was vanishing as my rate plummeted. True at all levels, someone with a $1M mortgage would deduct ~30k, so save 10K, but they are in a $1M house to begin with, 10K isn’t a down payment on a Tesla

  • Chanelle

    Actually it does lol… they make you escrow or you have to pay points not to… not really worth it on my opinion

  • SFnative74

    Believe what you want. I’m not going to spell out my finances. The deduction saves me thousands a year and when you are paycheck to paycheck (“house rich, cash poor”), that makes a difference. I’m early in my mortgage too so interest payments make up a higher proportion of my payment. Lastly, interest rates for 30 year fixed loans are at 2017 lows of 4%, not 3%. You’re a numbers guy so you’ll appreciate the significance of being off by 33%.

  • John Murphy

    I worked harder in college and was able to land a job so I could get a 15 year fixed.

    Maybe you should take some classes or something.

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