Eliminate the mortgage deduction?

A couple of readers have asked my opinion on this proposal by the deficit reduction committee which puzzles me, because my opinion is as irrelevant as theirs. But for the record, I’m all for it. Why should renters have to pay with after-tax dollars while borrowers get the break? It’s a market-skewing tax, like so many others, and I think it should go.

But it would be grossly unfair to impose it retroactively, since so many middle class borrowers calculated their purchase based on that break. Going forward, however, I’d like to see the playing field leveled. Fat chance, with the Realtors and home builders lobbies zeroing in on this, but we can always hope for a more rational tax code.


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22 responses to “Eliminate the mortgage deduction?

  1. Anon

    With interest rates so low, its not like eliminating the deduction would raise much revenue. So why are politicians looking to open up this messy (and unpopular) can of worms?

    • Anon, the way I understand it, the panel was just putting a bunch of options on the table, and inviting the pols to pick and choose. We have so many built-in preferences in the tax code that eliminating some of them would only help, but I doubt this will be one of them, even though I personally think it should be.

  2. anony

    I think it’s a good idea to put issues that seem like non-starter on the table now because it’s just a matter of time before the unthinkable becomes the essential.

  3. Inagua


    It depends on one’s defination of “much revenue.” The estimate is $131 billion.


  4. George Crossman

    We have heard this argument before. “Not fair to renters”. If it’s about fairness let’s get really fair and not charge the education portion of the property tax to those who no longer have kids in the school system. We can get even more fair and not charge commercial property owners that portion either because commercial buildings never send kids to school. Why do families, who have been forced to move from Greenwich due to the economy, have to pay a conveyance tax when they are losing money on their home? Where does that stack up in the “fairness” category? The entire tax system is unfair no matter how you slice it. Renters never pay their share of the education portion of property tax through their rent. Reagan simplified the tax code and it was said back then “in twenty years we’ll be right back where we started” with the tax complexity. Easy fix when you don’t have a mortgage.

  5. If they can lower marginal tax rates as part of the same reform package it would offset a lot of the impact on homeowners. I think they should just phase it out over 10 years. But I don’t have a mortgage so I’m probably biased.

    I remember when they eliminated the deduction for personal interest and everyone said it was going to kill the credit card industry. We all know how that turned out.

  6. edgewater

    my good friend, who for years was the senior u.s. tax partner of one of the big eight, or big six, or big four accounting firms, said that we’ll never get real tax simplification because selling special tax provisions is the golden goose of campaign contributions at the federal level. makes sense to me.

  7. the proposal

    Reading the whole proposal is helpful here. The proposal calls for lowering the marginal rates to 23% vs the high 30s, but eliminating certain deductions which get homeowners and property owners to the mid 20s anyways.

    Taking both sides of the proposal makes sense, just eliminating the deduction, while keeping the rates at the Bush or Clinton levels, would cripple housing and put lots more people “under water”

  8. So okay, let’s say that anyone buying henceforth doesn’t get a mortgage interest deduction. So if I have one now, and will lose it if I buy a different house– maybe it doesn’t make as much sense any more for me to buy and sell. So an already dry market gets dryer, and we all just stay in whatever houses we’re in now.

    Not that I don’t agree with your concept– but how do we get everyone off the mortgage deduction teat?

  9. Peg

    I’m someone who does think that there are benefits to society when people own their own homes. So – I’m in favor of continuing to allow a deduction – but having a sensible cap on it. If the cap were $500K, these days you could purchase a fairly nice house in Mineesotah…. but what does that get one in Greenwich; half an outhouse?

    If you want to spend over $500K, go ahead. Just don’t expect taxpayers to subsidize it.

    If the “we’re going to get rid of it altogether” group wins (and I can see arguments in favor of it, surely) – then phase it out for those who are now enjoying it. Deduct 80% 1st year, 60% second, and so on and so forth.

    BTW- here in MN, we do allow renters to get a rental credit on their taxes. We are progressive 🙂

  10. JRH

    Crossman, this isn’t even close to being analogous with saying those whose children aren’t in the public education system should be exempt from paying for it. Public education is a public good — it’s in the public interest to have a well-educated citizenry. You benefit from living in a country with a well-educated workforce and citizenry even if you have kids at private school or no kids at all. In stark contrast, renters do not benefit at all from subsidizing other peoples’ mortgages — nor does the country benefit from the artifically high housing prices that are a result of the mortgage interest deduction.

  11. AFW

    Average income of a working stiff in this country is ±$38,000. Why not try the flat tax – no deductions of any kind – on all income (capital gains, dividends, salaries, etc…) over ±$38,000, inflation adjusted. I think the current percentage proposed to equate current revenue under our regressive scheme is somewhere in the upper 20’s. For the vast majority of us it becomes a payroll tax and never again a burden on the individual, well worth throwing a few lousy lawyers and cpa’s on the welfare line.

  12. Anonymous

    Cutting out most deductions would certainly be less complicated. Regarding mortage deductions you are making an incorrect conclusion. Commercial real estate owners get a full deduction for interest paid which in a free market is then reflected in lower rents, so renters aren’t being screwed. Also remember that all deductions are phased out for high income folks.

  13. George Crossman

    JRH. The discussion wasn’t about if Public Education is for the public good or not. The Debt Comission mentioned “fairness to renters”. Public Good is what is used to justify all taxes. If “artifically high housing prices” are a result of the mortgage interest deduction how do you explain home prices over $2million or $10million? The deduction is capped at $1million. PS: Try not to make it personal.

  14. Just the Facts!

    Welcome back from the uplands, Chris! But I can’t agree with you on this one. Renters can not enjoy the same tax benefits as landlords/stakeholders. Renters by their nature are transients…and no, this is not a moralistic judgment. They can move whenever they want only to lose first/last/security…if that much. Try moving with no buyers and tons of equity in your home. It’s not easy to walk and move to another locale at will when you are a land owner. Being a stakeholder has to have benefits….i.e. an illiquidity premium. Not to mention, despite the past ten years where credit standards did not exist….homeowners/landlords/stakeholders generally took care of their homes and had a motive to stay involved with their respective community’s…to make sure their investment/home did not decline. Therein lies the original reason for the mortgage deduction.

    • Just the – I’m not at all sure of my hip-shot opinion on this one. I guess I’m coming from a revenue, rather than a policy driven tax system, so I’d prefer a neutral policy, but that’s unlikely to come in my lifetime. And as another commentator correctly points out, landlords get the tax deduction for their mortgage interest and, in a balanced market, pass that along to tenants via a lower rent. “Mongo have great pain in head”.

  15. JRH

    Peg et al: The idea that we need the mortgage interest deduction to promote homeownership is mistaken. Canada and Australia have no mortgage interest deduction whatsoever and have similar homeownership rates to the United States.

    Crossman: Wasn’t making anything personal, just responding to your argument. I don’t deny that ultra high-end housing ($10m, etc) exists, and that people who buy a $12 million “home” probably don’t care much about being able to deduct $1 million in mortgage interest. But it’s undeniable that the mortgage interest deduction allows people to buy houses at prices they otherwise could not afford. That’s not subsidizing homeownership, that’s subsidizing unsustainably expensive homeownership.

    By the way, the free-market position here favors the ending of this and other market-distorting tax credits and subsidies. I agree it ought to be phased-out, but starting sooner rather than later would be better.

  16. Inagua

    Canada also requires by law a 20% down payment. There is a work around, but as a principle of financial regulation it is near perfect. A very far cry from George Bush cheerleading as a municipal employee buys a house he can’t afford with no money down and all financing from the federal government.

  17. jimgilvin

    -Landlords can depreciate their properties for tax purposes, homeowners cannot.
    -Landlords can deduct losses taken on a property sale, homeowners cannot.
    -Landlords can deduct maintenance expenses, homeowners cannot.

    The removal of homeowner mortgage deductions without addressing these disparities would only distort the equilibrium further.

  18. JRH

    Seems my comment went from “awaiting moderation” to gone into thin air. Hmm.

  19. JRH

    That’s unfailingly true, you do. Thanks.