Every doctor knows that a patient recovering from a quadruple heart bypass is a poor candidate for elective surgery.
That’s the status of the housing market these days as tax reform advocates pound the pavement for putting the home mortgage interest deduction on the chopping block. With home prices and sales finally beginning to recover from the worst housing collapse in U.S. history, it would be asking for trouble to start tinkering with what every economist agrees is a major prop for home prices – the deductibility of interest on bank borrowings to buy homes.
“The housing market is still fairly fragile,” said Stan Humphries, an economist at Zillow.com. “Removing it altogether would be a shock to the housing market.”
“It would be painful for some time,” agreed Sam Khatar, deputy chief economist for CoreLogic. “Now is not the best time to do it because the patient is very weak.”
Yet there are plenty of reasons why redrawing the nation’s biggest housing subsidy program ought to be part of any serious program for reforming the nation’s tax code next year.
First, the home mortgage interest deduction flows mostly to the top half of the income distribution –the people who can afford to pay the mortgage, taxes, insurance and maintenance on a home. Households earning over $200,000 a year capture about a third of the $90 billion in tax benefits. Those earning between $100,000 and $200,000 captured another 42 percent of the benefits.
Meanwhile, households earning less than $50,000 a year – that’s nearly half of Americans since the median household income in 2011 was just $50,054 – received just 4.3 percent of its benefits or about $4 billion a year. This is the same group that is already taking it on the chin from the current Congress, which has cut direct housing assistance like public housing and subsidized rents by $2.5 billion a year, according to the Center for Budget and Policy Priorities.
The interplay of the housing market and the progressivity of the tax code skews the mortgage interest deduction’s benefits toward the well off. Though 63 percent of American householders own their own homes, most of those who don’t are in the lower half of the income distribution.
Among homeowners, wealthier people tend to live in larger homes in more expensive neighborhoods with larger mortgages, which require paying more tax-deductible interest. The median price for existing homes sold in July was $188,100. People who can afford larger mortgages are in higher tax brackets, so not only do they pay more, but each dollar of interest deducted is subsidized to a greater extent than the interest paid by a homeowner in a lower bracket.
For instance, a family in the 15 percent tax bracket that bought the median-priced $188,000 home with 20 percent down at current interest rates would receive about $2,700 off their taxes from deducting their mortgage interest. But a family in the 35 percent tax bracket that purchased a $1 million house with 20 percent down would receive about over $17,000 in tax breaks. Even if that wealthier household took out the same $150,000 mortgage as the median household (perhaps they are older with lots of equity from previous homes rather than being a younger first-time homebuyer), it would receive a $5,250 tax break – more than twice as much.