It is fashionable to say that the United States’ best days are behind us, that we are too divided and dysfunctional to fix things that are broken, or to do anything worthwhile. I think America is still great, capable of both advancing onward to greater things and rectifying our past mistakes. As it happens, this is the perfect political moment to fix one mistake in particular: ending the mortgage interest tax deduction once and for all.
Maybe that’s not at the top of your list of America’s problems. And it’s nowhere near the worst sins our nation has committed. But the mortgage interest tax deduction is terrible policy, as any wonk who is not working for a real estate lobby will tell you (volubly, at great length, and very possibly punctuated with explosive profanity).
The deduction is regressive, benefiting only the small minority of taxpayers (under 10 percent as of 2020) who have enough income to bother itemizing their deductions. Since someone has to make up the lost tax revenue, it’s a transfer to the upper class from the middle class; to homeowners in expensive markets from those living in modestly priced locales; and to people who buy the biggest home they can, and mortgage it to the absolute hilt, from those who save for a sizable down payment, buy a sensible amount of house and pay down their loan as quickly as possible. “Tax the middle class more heavily so that successful professionals can buy bigger houses in pricier cities” obviously is not good public policy, though of course it might sound appealing if you happen to be a successful professional living in a pricey urban area like, oh, say, Washington, D.C.
[Writer looks at her mortgage statement, swallows hard, squares her shoulders and soldiers on.]
Perhaps these infelicities could be tolerated if they increased the rate of homeownership, benefiting families and their communities. Unfortunately, many studies suggest that the boost to homeownership is marginal at best — unsurprising given that, as mentioned, the tax break mostly benefits people who could afford (somewhat smaller) homes without it. Australia’s 66 percent homeownership rate, which doesn’t have a mortgage interest tax deduction for owner-occupied housing, is almost indistinguishable from America’s 65.6 percent rate.
Whatever tiny benefit it might create is incredibly costly. Thanks to the 2017 Tax Cuts and Jobs Act, which limited the value of the deduction by reducing the maximum qualifying loan value from $1 million to $750,000 for a married couple filing jointly, and by increasing the size of the standard deduction, this regressive subsidy costs the treasury “only” tens of billions of dollars a year. But with the TCJA set to expire next year, more taxpayers will likely be itemizing their deductions, for bigger loans, which will cost the treasury an estimated $100 billion a year by 2030.
Which is the main reason now is the moment to get rid of the thing once and for all.
According to the Tax Policy Center, in 2017, 31 percent of all taxpayers itemized. By 2020, that figure had fallen to 9 percent. It is obviously easier to take something away from 9 percent of the population than from 31 percent. Moreover, Congress is going to be looking for new revenue sources because, with the TCJA expiring, we’re set for a big legislative fight over the tax code. And gone are the days of zero-percent interest rates when (as congressional staffers kept giddily informing me) deficit spending was literally free.
What’s happening to interest rates is the second reason this is the perfect moment to go after the mortgage interest deduction. Right now, most American homeowners are still sitting on ultralow rates. So while the average interest rate on new mortgages more than doubled between September 2021 and September 2023, the average rate on all outstanding mortgages increased by only a few tenths of a percent.
Of course, things won’t stay that way forever. As the TCJA expires, more taxpayers probably start itemizing again and the average interest rate on existing mortgages rises, it will become more and more difficult to slay this monstrosity. Moreover, if legislators strike now, they will have an additional cheat code to help them: The National Association of Realtors, our nation’s most powerful lobby on matters of residential real estate, has recently been beset by internal strife, external legal issues and a civil settlement that threatens to capsize the whole financial model of the industry.
Congress should move now, while rates are low, itemizers are few and the NAR is distracted. I can’t promise they’ll have an easy time of it. But I can promise that there will never be a better time to do the right thing.