Mortgage Interest Deduction
Mortgage Interest Deduction has been around so long because it works
By GWEN LILLEY
It's hard to read or watch the news and not find a story about a housing industry controversy where political or philosophical rhetoric isn't clouding the core issue. A good example is the current debate over the Mortgage Interest Deduction.
This 1913 facet of the U.S. Tax Code is now a target of deficit reducers and tax reformers.
Critics argue it's too expensive, that it encourages people to shoulder more housing debt than they should and that most taxpayers get no benefit from it. Some want new limits placed on it, others want it eliminated. It's enough to make some wonder- if it's such bad policy why has it lasted for almost 100 years?
It's been at the core of the Tax Code for almost a century because it's good policy that works.
Here's why:
The most recent IRS tax return data available shows 63 percent of the families who claim the Mortgage Interest Deduction earn between $50,000 and $200,000 per year. That puts it squarely in the middle-class America income range - the segment of the population that drives the economy. While it's true that only a third of taxpayers itemize, of those who do more than 80 percent take the MID.
There's little argument that homeownership is an investment in a person's future or that it promotes significant social benefits that strengthens communities. Those widely accepted and desirable social and economic conditions dovetail with the results of a National Association of Realtors' survey of home buyers that shows both first-time buyers and repeat buyers ranked the desire for tax incentives as an important reason to buy.
Arguments that the MID encourages buyers to assume more debt than necessary ignores the fact that people don’t buy homes to get a tax deduction. They buy homes to satisfy social, family and personal goals while the MID facilitates homeownership by reducing the ownership carrying costs.
The amount of debt the government and individuals assume is a legitimate concern, but so is distinguishing between good debt and bad debt. The folks at bankrate.com do a good job of explaining the difference for a consumer perspective.
"Good debt is investment debt that creates value; for example, student loans, real estate loans, home mortgages and business loans," says Eric Gelb, CEO of Gateway Financial Advisors and author of "Getting Started in Asset Allocation”.
"Robert D. Manning, a professor of finance at the Rochester Institute of Technology, also recommends taking on debts that are tax-deductible and debts that produce more wealth in the long run."
The most common example of bad debt focuses on buying disposable items or durable goods with high-interest credit cards and not paying the balance in full at the end of the month.
Each time a partial payment is made on this type debt, interest is charged and the item or commodity continues to lose value.
Many economists agree that changing the MID will have a negative effect on home prices and values. While there are no hard figures showing how much effect it would have, the result would be noteworthy here since the housing sector accounts for a little more than 13.4 percent of the total state gross product in Tennessee. Another shock to home prices and values would hamper the economic recovery, raise foreclosures and hurt banks’ abilities to lend.
That's why the National Association of Realtors doesn't think the MID should be targeted for change. Any changes could erode the value of homes and homeownership, effectively closing the door on the American dream. NAR opposes any tax reform plan that does not retain the deductibility of mortgage interest and opposes any effort to convert the MID from a deduction to a tax credit.
The Mortgage Interest Deduction has been an integral part of the U.S. Tax Code and fiscal policy for almost 100 years because it works.
It isn't broken, so why try to fix it?
