For years, one of the benefits of owning a home in the United States has been the tax break that comes with it -- the income tax deduction for mortgage interest paid. This deduction has been in place since 1913, but it has come under some scrutiny lately.
In fact, arecently released paper published by researchers at the Tax Policy Center suggests it might be time to reform the tax policy as it pertains to this deduction.
In some ways that might make sense. Look overseas, and you will see a nation -- Greece -- that has all but collapsed economically because its government can't raise enough revenue to prop up all its expensive entitlement programs. The amount U.S. taxpayers will deduct for home interest in the tax year 2012 is expected to cost the U.S. government about $131 billion.
That's just a drop in the bucket of the national debt, but if you get the feeling that the U.S. government is going to have to one day "pay the piper" in regard to its spending, that $131 billion or so might seem like a good start to you.
It's also fair to ask whether the government should be subsidizing homeownership with tax policy, which, in effect, it does with the mortgage interest deduction. Even if promoting homeownership is something that's desirable -- I, for one, believe it is -- is the mortgage interest deduction an efficient way of doing it?
In Canada, mortgage interest is not deductible on a primary residence. Yet home ownership rates in Canada are largely the same as in the States. What's different is the amount of equity Canadians have in their homes -- about 70 percent on average compared to about 45 percent. So it's fair to ask if the MID promotes ownership of homes that could be too expensive for their owners.
The Tax Policy Center study mentioned above actually says that the deduction does not affect home ownership rates. In fact, many taxpayers don't use the deduction, even if they own a home. This is because most tax payers do not itemize deductions.
The paper also argues that the wealthy benefit much more than the lower class when it comes to the tax credit. More expensive homes mean larger mortgage interest deductions, and higher tax brackes mean the bigger dollar-for-dollar breaks for the better off. President Obama's budgets for 2010 and 2011 have included capping the MID at 28 percent, even for those in the 33 and 35-percent tax brackets. Congress has not enacted that cap, however.
The paper compares alternatives for reforming the tax policy as it pertains to mortgage interest. Making the tax break a credit rather than a deduction, for example, might help lower-income tax payers more than the current system, the paper finds. The study suggests that there policy could be reformed to either increase the U.S. tax revenue, or to promote home ownership more at the same dollar cost as the current MID.
Personally, I don't see this deduction disappearing any time soon.
For one, it would be political career suicide for any incumbent member of congress to start introducing any measures that would essentially amount to higher taxes during an election year. The fact that the home builders and real estate agents have some pretty powerful lobbying efforts in Washington would also make it difficult for radical changes to take place.
On top of that, real estate is an industry that's down right now, and for the federal government to kick it while it's down would deal a severe blow to the overall economic recovery in the U.S. Why would the feds prop the industry up with the tax credits that just expired, only to turn around and deal a blow that would knock the market back?
There's no question that the U.S. cannot keep spending money it doesn't have -- on social security, on proposed health care programs -- without somehow adjusting revenue to keep up. So you will probably continue to read about the mortgage interest deduction disappearing.
But don't bet on it any time soon.
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