October 14, 2005
Reform
the Mortgage-Interest Tax Deduction
By Froma
Harrop
The deduction
for mortgage interest is the "third rail" of tax reform
-- not to mention the trap door, poison pill and banana peel. President
Reagan tried to get rid of it in 1986, but real-estate interests
stopped him. Now, President Bush's tax advisory commission suggests
limiting its use. Good idea, I say, and good luck.
The mortgage-interest
deduction is bad economic policy. It encourages consumption, rather
than saving. People take out big mortgages to free up spending
money. (A little devil tells them not to worry about all the borrowing
because the interest on the loan can be tax-deductible.) An unhealthy
economic incentive, the deduction is also expensive. It cost the
Treasury $63 billion last year in needed revenues. The entire
budget of the U.S. Department of Housing and Urban Development
was $35 billion.
The deduction
is bad social policy. It discriminates against renters, and even
homeowners of moderate means.
"The
people who have the biggest homes, who make the most money are
the greatest beneficiaries of this tax subsidy," says Nicolas
Retsinas, director of the Joint Center for Housing Studies at
Harvard University. "If you rent, you don't get the deduction.
Even if you own a home and have a modest income, you're likely
to take a standard deduction, which means you don't get it."
The mortgage-interest
deduction is a boulder in the stream of tax reform. A lot of people
say they want a "flat tax" -- a single rate for all
incomes, with no deductions, exemptions or loopholes allowed.
A flat tax could cure the annual migraine of filling out IRS forms.
But there can be no honest flat tax that makes an exception for
a break that benefits the well-to-do.
In recommending
tax reform, Bush's advisory panel has to offset any cuts with
new revenues. It rightly wants to kill the alternative minimum
tax, and suggests limiting the mortgage-interest deduction as
a way to replace some of the lost revenue. (The alternative minimum
tax was designed 35 years ago to ensure that the rich pay their
share. Not adjusted for inflation, the tax is rampaging through
the middle class and has to go.)
The commission
has been talking about ways to limit the mortgage-interest deduction
without stepping on too many toes. Right now, Americans can deduct
all the interest paid on mortgages written for up to $1 million.
The panel is considering whether that cap might be reduced to
the size of the biggest mortgage currently insured by the Federal
Housing Administration. Nowadays, that means a mortgage of about
$313,000 in expensive communities, or a national average of $244,000.
The average
American mortgage weighs in at about $155,000, so this lower limit
would not change the calculus for most of us peasants. However,
the cap would pinch some nerves in trophy house territory. The
real-estate industry would not like that at all. The bigger the
mortgage people can afford, the more they can pay for a house,
and the more real-estate brokers and developers rake in.
A more noble
concern over altering the mortgage-interest deduction centers
on America's wildly divergent costs of living. The median price
of a home is about $220,000 in the United States, but $550,000
in San Francisco. A $400,000 mortgage, while amazing to most Americans,
would not be a rarity on Nob Hill. Any proposal to limit the mortgage-interest
deduction has to be very sensitive to these issues.
But should
we even bother thinking about the details at this point? The odds
are not wonderful that Congress will summon the courage to trim
this deduction. If the past is any guide, the meekest attempt
will fire up the real-estate industry's propaganda mills. Soon,
Americans not even remotely affected by the proposed changes will
believe in their bones that they are losing some beloved tax deduction.
That's a
cynical view, but unavoidable. Our government seems incapable
of asking the smallest sacrifice of the biggest incomes. Here
is a tax break that favors the upper brackets while hurting economic
growth, and we can't get a consensus in Washington that it is
a bad thing.
Reagan was
right on this one. And so is Bush's tax advisory commission. Is
there a brave political soul out there looking for a good policy?
Copyright
2005 Creators Syndicate
