A couple weeks ago I was in Washington, D.C., for work. My day job is as the editor of Shelterforce magazine, a national nonprofit magazine for people working in the fields of affordable housing, neighborhood revitalization/stabilization, and community organizing (and as associate director of its publisher, the National Housing Institute, which also does research and other projects).
On my third day there, I was sitting taking notes at a rapid-fire panel discussion on the future of housing finance, when I started to feel like I’d entered the twilight zone. Was I getting confused by my lack of tea or the demands of juggling a work trip and sightseeing with my family? Or had I just agreed with the guy from the Cato Institute? On the very same topic on which I’d disagreed with the otherwise wonderful, inspiring, feisty Sen. Jeff Merkley (D-Ore.) the day before?
Funny things happen when you start discussing the mortgage interest deduction.
The mortgage interest deduction, known as the mansion subsidy to its detractors, has long been considered a third rail of politics—like Social Security, it benefitted too many people, including lots of non-poor people, to attack. (Not that that seems to be serving Social Security as well now as it used to.) The National Association of Realtors hyperventilates: “to even mention reducing the tax benefits of homeownership could endanger property values.” (Too bad they haven’t been worried more about a bunch of other things that were/are a lot more dangerous to property values and access to credit, like, oh say, financial deregulation.) And even Sen. Merkley, in proposing to add a homebuyer tax credit that would reach more people, felt the need to emphasize he wasn’t suggesting that the deduction be reduced.
Unlike Social Security, which has been phenomenally successful at reducing extreme poverty among the elderly and disabled, there’s scant evidence that the MID actually achieves its purported goal of increasing homeownership. Most who’ve studied it agree that it mostly results in people who would have bought anyway buying bigger/more expensive houses.
It’s also incredibly regressive. For example, in 2004, people making $20,000 to $30,000 per year made up only 1.6 percent of those taking the deduction and they got an average of $500 back. Those making over $200,000 made up 22 percent, and their average savings was over $7,000.
For the non-itemizing or non-homeowners among you, here’s how the deduction works: If you itemize your deductions, one thing you can include is the interest you paid on a home mortgage on a primary or second home up to $1.1 million or on a home equity loan up to $100,000 made for any purpose. (That means you could pull equity out of your home to buy a yacht, and then deduct the interest.)
Unless you owe enough taxes and pay enough mortgage interest to make itemizing worth it, you get no benefit from the deduction at all. But for those who can take it, the larger the mortgage, the more benefit you get, up to the cap.
Meanwhile, it is expected to cost the U.S. Treasury $104 billion in 2011. Just for comparison, that’s more than twice the entire HUD budget (including public housing, Section 8, homeless assistance, CDBG, elderly housing, housing counseling, and more), for FY10, which was 43.6 billion. And that’s not going up. The next time someone frets about the money we spend on housing the poor, remind them of all that money we spend on housing the not-poor.
Shelterforce has been arguing against the mortgage interest deduction for, quite literally, decades for precisely these reasons: it’s a waste of money that doesn’t serve a public purpose. It has often felt like shouting into the void. But one silver lining to the current deficit obsession is that along with spawning a lot of wrong-headed, economy-destroying measures, it does seem to be creating a climate where reforming the MID is at least being discussed seriously by people of a wide range of political persuasions.
There are many options for reform—lower the cap, get rid of the second home option, allow it only for home equity loans that are spent on the house itself, make it either a flat deduction not based on your tax bracket or a credit available to all homeowners. The credit (with a cap of $800) was proposed by candidate Obama. He’s now talking a flat deduction.
I’d prefer the credit, but mostly I’d prefer meaningful action. Leaving the mortgage interest deduction as it stands, while we cut basic services, fail to create jobs, and allow our physical and economic infrastructure to continue to deteriorate, is unconscionable.