To the surprise of many, the House Ways and Means Committee’s tax reform plan would cap the amount of mortgage debt taxpayers can deduct at $500,000, a sharp decrease from the current $1 million cap. The proposal is politically risky, as the home mortgage interest deduction (HMID) is, in the words of political commentator Bruce Bartlett, the “third rail” of tax reform. Powerful interests support the HMID, and they have the resources to attack any politician who dares to undermine it.
The HMID is one of the single-largest tax expenditures in the American tax code. Introduced as part of the legislation that created the federal income tax in 1913, it cost the government $70 billion last year. Since the 1970s, the potential savings from eliminating or capping the HMID have made it a perennial target for ambitious tax reformers looking to broaden the tax base in order to lower rates.
Experts agree the HMID is costly, distorts housing markets and does little to boost homeownership. Yet despite these obvious shortcomings, tax reformers have largely failed to shrink or eliminate it. The HMID persists not because it is good policy but because it is protected by industry groups keen on guarding their own interests.
Only once in history have reformers overcome these groups to limit the HMID, and that success, in contrast to several earlier failures, tells us under what conditions the House’s proposal might find its way into law.
In 1975, influential tax reformers on the Ways and Means Committee added a provision to cap the total amount of consumer and mortgage interest that could be deducted at $12,000 ($54,599 in 2017 dollars). Knowing the political power of the interests arrayed in favor of the HMID, committee liberals used procedural moves to tack the reform measure onto an existing tax extension bill. This limited the housing industry’s influence, because lobbyists could not strip the provision out without defeating the entire bill. The move worked and the bill sailed through the House.
The housing industry, however, got the last laugh. The provision wasn’t a priority for Senate Finance Committee Chairman Russell Long (D-La.), and he saw little value in tangling with its powerful opponents, which included the National Association of Realtors (NAR), the National Association of Home Builders (NAHB) and the Ford administration. Under pressure from these interest groups, he deleted the provision and the House caved.
A similar process played out in the lead up to the Revenue Act of 1978. During hearings in the Ways and Means Committee, the usual industry suspects attacked the idea of a cap. Lacking the full support of President Jimmy Carter and faced with the prospect of wasting their political capital on another proposal just to see it shot down after House passage, the committee abandoned its efforts to cap the deduction.
The HMID also escaped from the historic 1986 tax reform bill unscathed after President Ronald Reagan pledged to protect it. This created an aura of invincibility surrounding HMID — one that made successful changes to it all the more surprising in 1987. That year, as part of the Omnibus Budget Reconciliation Act, Congress capped mortgages eligible for the deduction at $1 million.
The effort began, as it did in earlier episodes, with liberal tax reformers in the House. They faced an uphill battle because Reagan threatened to veto any bill that raised taxes. But they gained a potential opening after Democrats regained control of the Senate for the first time in six years and Sen. Lloyd Bentsen (D-Tex.) ascended to chair the Senate Finance Committee.
Although no liberal, Bentsen was more open to compromise than his predecessors. He had to be, because the Senate confronted a pressing problem. A new budget law meant that if Congress and the president did not come up with $12 billion in new revenue by the end of the year, harsh automatic cuts in social programs favored by Democrats and military programs favored by Republicans would occur (as they did when sequestration went into effect in 2013).
This threat favored liberal reformers in three ways. First, it transformed the 1987 budget reconciliation bill into “must-pass” legislation. If they stood their ground on the HMID cap, reformers could force the Senate to compromise, especially because of the need for new revenue.
Second, the looming threat of automatic cuts limited the budget-crafting process to weeks rather than the usual months — or years — long process, which constrained the ability of housing industry interest groups to mobilize and lobby individual policymakers.
Third, adding the HMID provisions to a large reconciliation bill that would be negotiated in private by select members of Congress before being presented to the House and Senate for an up-or-down vote further shielded the bill from the influence of housing industry groups.
The House passed its bill, which included the HMID provisions, at the end of October. The Senate passed its own version without them in early December. With Christmas approaching, however, and pressure to produce a bill intensifying, Senate negotiators finally caved and accepted the House HMID cap. The bill passed both houses and Reagan signed it into law.
Despite the considerable lobbying power of NAR and NAHB, the story of the 1987 limits suggest that there may be hope for policymakers pushing to limit HMID today. That’s because many of the same conditions exist. Republicans have been criticized for crafting tax reform in secret and rushing to get it done by Christmas but they see this as “must-pass” legislation in the wake of their failed health-care reforms. They are also struggling to find additional revenue to fund more important priorities, including an enhanced child tax credit.
Secrecy, speed and pressure to pass something worked to the advantage of liberal tax reformers in 1987. The same could very well work to the advantage of conservative reformers today.