America’s favorite unfair tax deduction
The bill to repair Texas and Louisiana after Hurricane Harvey will likely top $100 billion, and Florida will be next in line for federal disaster assistance after Hurricane Irma blows through. Congressional leaders are straining to reconcile conservative fiscal values with the exigent needs of desperate Americans. Deficit hawks are restless, FEMA is almost out of money, and all Congress could agree on this week was a fractional down payment of roughly $15 billion. How can the government possibly find the rest of the money?
President Trump’s big tax reform proposal — back-burnered for now, but looming over Washington’s fall agenda — may include a provision that would raise hundreds of billions over 10 years, primarily from high-income taxpayers. Economists on the left and right support this idea because it would both shrink the deficit and restore a modicum of fairness to the tax code. The proposal would close one of the biggest loopholes we’ve got — but it’s also one of the most popular, so ending it would require a measure of political courage and fiscal responsibility not seen in Washington in years.
I speak of the home mortgage interest deduction, which costs the government $77 billion a year, artificially inflates housing prices, and does not demonstrably increase home ownership, the main argument for its existence. It’s a bipartisan sacred cow, embraced by powerful real estate lobbies, and a boon to prosperous coastal states with high housing costs (hello, Massachusetts). It is also well overdue for a re-think.
Many of us are familiar with the interest deduction, even though only 20 percent of tax filers use it. The provision lets couples deduct the interest on mortgage debt up to $1 million, including on second homes. It clearly skews to the wealthy: The bigger the mortgage and the higher the tax bracket, the bigger the break. Nearly half of American homeowners do not itemize their deductions, so they get no benefit at all. Matthew Desmond, the Princeton sociologist who won a MacArthur grant for his work on the US housing crisis, calls the mortgage interest deduction “a generous public-housing program for the rich.”
But would eliminating the deduction depress home ownership, that ultimate signifier of American success? Most analysts agree the tax break is mostly an incentive to buy bigger, more expensive homes — not to buy a house for the first time. According to economists Ed Glaeser and Jesse Shapiro , the home ownership rate in the United States has barely budged since the 1960s, staying within a narrow range of between 63 and 68 percent. The National Association of Realtors says eliminating the mortgage deduction (and other related deductions, such as for state and local property taxes) would reduce home values by 10 percent. But right now the tax break has the opposite effect — inflating home values — which only worsens the country’s already gaping wealth divide.
Eliminating the deduction outright is unlikely, and Treasury Secretary Steven Mnuchin has said that Trump’s still-evolving tax package would leave it intact. But lowering the cap from $1 million to $500,000 would protect more modest homeowners while still returning billions in foregone revenue. That would be an important step toward fairness, and also locate much-needed funds to repair a battered nation.
Of course, even if the mortgage deduction is eliminated, Trump and his team won’t necessarily spend the increased revenues on domestic programs. Indeed, the mortgage deduction “haircut” is mainly considered a way to pay for slashing the corporate income tax. Natural disasters like hurricanes and floods help focus the mind and even forge compromises, but Trump is above all a creature of the plutocracy. It will take a mighty shift in the political winds to change his course.
Renée Loth’s column appears regularly in the Globe.