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Wednesday, August 3, 2011

Cut the home mortgage interest deduction

The McClatchy newspaper chain, including Raleigh's News & Observer, ran an excellent story today that the deductibility of home mortage interest may be severely limited in an attempt to reduce the deficit. Specifically, the cap on mortgages eligible for the deduction would be reduced from $1 million to $500 thousand, and the deduction would be available for only a primary residence.

I would applaud that.

  • People who choose to buy high-end homes should be able to afford higher net payments -- or should be expected to put up a larger amount of cash toward the purchase.
  • The government should not be subsidizing second homes in the mountains and on the beach.
  • Because the mortgage deduction deprives the U.S. Treasury of $131 billion annually, a change in this law would generate truly significant income -- unlike a symbolic but financially microscopic change such as eliminating deductions for corporate aircraft. 
  • Low-income taxpayers would not be hurt because almost all of them take the standard deduction on their 1040 forms.
Will it happen? Perhaps not.
  • Many in the upper-middle class who benefit from this deduction want someone else -- in other words, the rich -- to fund the deficit entirely. They certainly don't want their lifestyles to be squeezed.
  • Politicians who represent mountain and beach properties will be pressured to resist.
  • Real estate agents, residential lenders, etc. will spread fear, uncertainty, and doubt -- even though Britain's experience was that repealing the mortgage interest deduction there had little effect on rates of home ownership or market prices for housing.
  • High-priced housing markets like San Francisco-San Jose, where $500 thousand doesn't buy a large home, will complain.
This question will be an interesting indicator of political will to narrow the deficit.