Home > 2011 > Mortgages

Trimming Mortgage Deduction for the Wealthy Comes Under Fire

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Scissors_Zechariah_Judy_CCFlickrThe Obama administration has proposed trimming a deduction for wealthy taxpayers, which it says will save $321 billion over 10 years and help close the federal budget deficit.

It’s called the mortgage interest deduction, and it allows homeowners to deduct the interest they pay on their mortgages from their taxes. The deduction costs the government $131 billion a year.

Special interest groups including the National Association of Home Builders are gearing up for a campaign to fight the change, saying it would hurt middle class and endanger the housing market’s already fragile recovery.

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“We will oppose any limit,” Jerry Howard, chief executive of the National Association of Home Builders, told CNN. “This is an attack on the middle class.”

But whether the subsidy actually helps the middle class is the subject of a long debate. Economists James Poterba and Todd Sinai found that families earning more than $250,000 a year reap deductions 10 times greater than middle class families. A study by the Brookings Institution found that most of the deduction subsidizes the purchase of larger homes by people who would have bought anyway.

The bipartisan National Commission on Financial Responsibility and Reform, created last year to suggest ways to trim the budget deficit, suggested replacing most of the deduction with a 12% tax credit paid to all taxpayers.

“Because most of the subsidy goes to individuals who would likely own homes without the tax benefit, it has little effect on homeownership,” the Brookings Institution found. Ending the mortgage interest deduction “would benefit low- and middle-income groups,” according to the study.

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The Obama administration’s proposal is far more modest. Taxpayers who earn $250,000 and up would be limited in how much they could deduct, and mortgage debt above $500,000 would no longer be eligible for an interest deduction (the current upper limit is $1 million of mortgage debt).

Nevertheless, the industries that benefit most from the mortgage deduction are gearing up to fight the proposed change. The National Association of Home Builders has created a new website to tell consumers its side of the issue. And it has partnered with the National Association of Realtors to win Congressional support House Resolution 25, which would affirm the importance of the deduction.

Image: Zechariah Judy

Editor’s note: On March 14, 2011 at 6:33 p.m., this story was updated to correct an error. Mortgage interest deduction is based on mortgage debt on the home, not on the value of the home, as originally reported.

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  • Terry Pratt

    If “any limit” of the mortgage interest deduction is “an attack on the middle class”, isn’t the mortgage interest deduction itself – because it promotes higher housing prices which harms those who are unable to buy – an attack on the working class?

    • Christopher Maag

      Hi Terry. Thanks for writing. You make an interesting point. Most experts I’ve talked to say that the deduction doesn’t make houses more expensive, since it’s a subsidy that applies to all homeowners. People who oppose it say that the problem is more that it’s a really inefficient subsidy, since most of it goes to higher-income people who would buy houses anyway, so that it becomes an indirect way for many middle-income people to subsidize just a few higher-income people. If you’re curious for more info on this, check out a really interesting study by the Brookings Institute: http://www.taxpolicycenter.org/uploadedpdf/412099-mortgage-deduction-reform.pdf

  • Cindy

    I used to volunteer for a consumer group. Every year the group got thousands of complaints about home builders’ shoddy construction, worthless warranties, and especially during the bubble–mortgage fraud done by builders’ in house lenders. The real estate and lending industry created and inflated the bubble, and had the pull to make sure the mainstream media kept telling people to “Buy Now!” Doing research for the consumer org, I was aware of warnings that it’d take out the economy and saw this coming as did many people in consumer groups, professors, bloggers, and the FBI. The picture that was painted about this industry, from what I saw, was that they never lobby for the “middle class” or the “dream of homeownership.” They lobby for their own profit, period. And part of profit includes lack of accountability for deceptive and illegal business practices, as well as lobbying for big tax breaks for themselves while they also lobby for “less big govt” out the other side of their mouths. What they really mean by less big govt is get the regulators out of their fraudulent business. With almost 100% accuracy I think I can say, if the builders are for something, I’m against it, and vice versa, because their ulterior motive has been against the public good in every bit of lobbying I’ve seen them involved in. This industry spends millions ever year on lobbying and campaign contributions and is well listened to by the bought and paid for politicians, when we voters cannot get but a form letter reply from them, if that. Rather than get big govt out of corporations business, I’d like to see corporations get out of the govt!

  • Christopher Maag

    Thanks for your thoughts, Cindy!

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