Mortgage Tax Credit in the Crosshairs?

By Dave Fratello | November 29th, 2012
Let's start by saying this: The odds of the mortgage interest tax deduction being eliminated are so remote, you'd have had better odds betting a paycheck on the big Powerball draw.

But there's no doubt that the mortgage tax break is a big fat target leaders are looking at while the "fiscal cliff" negotiations are going on. It may no longer be "untouchable," according to this new Washington Post story.

Hey, unthinkable things are already happening, like prominent GOP leaders giving the finger to Grover Norquist.

So why not debate this huge tax break?

Calling the $100 billion-per-year impact of the interest deduction an "extravagance" the nation can no longer afford, one pointy head says in the Post:

We simply cannot afford wasteful government subsidy programs anymore, and this is one of the most important examples of that. It’s very much a subsidy to those Americans who need it least.
That commie rhetoric comes from USC prof Edward Kleinbard. SC? Dude!

The deduction for mortgage interest dates back to 1913.

Here, it's about to celebrate its centennial, and we're talking about snuffing it out with a pillow?

Of course, if this were done overnight, it would be unfair and destabilizing.

Unfair because some number of homeowners figured the tax benefit into their calculations in making a home purchase. It's kind of crude to say all these families "need it least."

There's also no doubt that, just as low mortgage rates (like today's!) promote affordability and feed price increases, the deductibility of interest payments plays the same role. Take it away, and it's like increasing rates: Prices will, necessarily, suffer, and fewer people will be able to get the home of their choosing – at least until the impact of the change settles out.

So if your goal is to destabilize the housing market with tax policy while the Fed earnestly shovels money at making mortgages cheaper to boost the market, well, go right ahead and try.

Still, the critics have a point. From the same WaPo article:

"It’s a clunky subsidy for home ownership,” said Ted Gayer, co-director of the economic studies program at the Brookings Institution. “It also subsidizes things we don’t want to subsidize, like borrowing a lot of money for your home. . . . It’s a tax credit for people who have large mortgages.”
All fair points. Manhattan Beach home prices are so high, nearly everyone pulling a mortgage is getting a huge benefit from this "tax credit."

And it's also true that tens of millions of people have suffered all kinds of unthinkable cuts to their benefits and programs, in many cases their lifelines, not merely their favorite tax loopholes.

So it's a little hard to cry for (us) upper/middle classes who reap the bulk of the benefit of this one deduction. Everyone's hurting; should the pain be shared?

Predictions: They'll resolve the "fiscal cliff."

They won't mess with the mortgage interest deduction.

But watch out for the sleeper solution – endorsed, more or less specifically, by Mitt Romney this year – caps on total deductions, which water down the mortgage deduction.

That would be an assault on the deduction by another name... an end run. And, not incidentally, one that would pit nonprofit charities against housing – not pretty. And after that?

Please see our blog disclaimer.

Latest Listings Among
Manhattan Beach Homes For Sale