Taxpayers who own a home and itemize their deductions can subtract interest paid on mortgage debt from their income. The report shows that those with higher incomes and property values are most likely to take advantage of the tax break. Less than half of homeowners across the country claimed the deduction in 2010.
Although Maryland topped the list, Virginia was not far behind. About 33 percent of tax filers there claimed an average deduction of $4,179. About 25 percent of District tax filers claimed the deduction, putting it in line with the national average.
The deduction, one of the largest expenditures in the U.S. tax code, is fiercely guarded by some lawmakers and interest groups. But some argue it should end up on the chopping block, or at least be retooled, as lawmakers contemplate an overhaul of the tax code.
“Looking at who benefits by state should inform federal policymakers as they consider options for changing or eliminating tax expenditures over the next several years,” Pew’s Anne Stauffer, an expert on federal and state fiscal policy, said in a statement.
The congressional Joint Committee on Taxation estimates that 78 percent of mortgage interest deductions in 2010 went to households with incomes of more than $100,000. Last year, 34 million households claimed the deduction, costing the federal government $68 billion in lost revenue, according to the committee.
Pew said several factors likely contributed to the geographic disparities in the deduction, including having a high turnover rate in the housing inventory.
The nonprofit group found that 41 percent of tax filers in the Bethesda-Gaithersburg-Frederick area claimed the break in 2007, the highest percentage in the country. Those homeowners received an average deduction of $6,775.
About 39.8 percent of tax filers in the Washington-Arlington-Alexandria area claimed the tax credit, which was also way above the national average of 27 percent. Those homeowners received a tax break of about $6,736.
Those figures were based on 2007 Internal Revenue Service data, the most recent available.
States along the East Coast and in parts of the West had the highest concentration of claims, while those in the South, particularly from Texas to Mississippi, had the lowest rates, the report said.
At a House Ways and Means Committee hearing last week, economist Eric Toder of the Urban-Brookings Tax Policy Center urged Congress to replace the deduction with a tax credit. The credit, for example, could come in the form of an investment credit for first-time home buyers.
“If the goal is to promote home ownership, the mortgage interest deduction should be restructured, with more of the subsidy directed to low- and middle-income taxpayers who are more likely to be deciding whether to own or rent,” Toder told lawmakers.
Some economists and think tanks want to prevent homeowners from claiming the tax break for second homes.
But some industry groups caution that any significant change to the mortgage interest deduction could have a detrimental affect on the nascent housing recovery.
At the hearing, Gary Thomas, president of the National Association of Realtors, said, “The values of such tax benefits are both directly and indirectly embedded in the price of a home.”