Trimming the mortgage interest tax deduction has often been brought up as a way that the government can reduce the deficit, and this perennial suggestion has been brought up on the chopping block yet again.
Analysts and economists have said that eliminating the deduction — which lets homeowners write off a portion of their monthly mortgage payments — could save about $100 billion per year.
That figure comes from the liberal policy group, the Center of American Progress, which has joined other groups across the political spectrum in calling for reform of the credit. The Reason Foundation, a libertarian policy group, is also an advocate. A suggestion to lower the cap on the credit and keep it from applying to second homes was included in the “Gang of Six” borrowing plan proposed earlier this month — signaling that lawmakers were also open to going after the popular tax break.
Why is this idea building steam?
“It's a confluence of several factors. First, it's such a large tax break," Donald Marron, director of the Urban-Brookings Tax Policy Center, told Reuters in an interview. “And the tax treatment of housing is much more favorable than we provide for most other investments people undertake.”
There have also been questions raised about the effectiveness of the credit.
“The mortgage interest deduction...does nothing to improve housing affordability, its ostensible goal,” wrote Moody’s Analytics chief economist Mark Zandi in The Washington Post earlier this month. “Any tax benefit is simply capitalized into house prices, which rise as the deduction fuels demand. And the benefits go to owners of bigger homes with larger mortgages and higher incomes, who can itemize and thus claim the deduction.” Zandi said that the deduction is worth $1.4 trillion over the next decade.
But not everyone agrees. Bob Nielsen, chairman of the National Association of Home Builders Association wrote in The Washington Post this May that would cause a drop in housing prices and undercut an already struggling market.
“The mortgage interest deduction has been embedded in our tax code for nearly a century, and this longstanding policy has helped millions of Americans achieve the dream of homeownership,” Nielsen wrote.