Time to Renovate the Mortgage Interest Deduction
The lack of affordable housing in America’s fast growing cities is reaching epic proportions as more and more families are being priced out of home ownership. In 2012, a middle class family could afford 44 percent of the homes for sale. By 2016, the share of affordable listings declined 12 percentage points to just 32 percent.
This housing equality gap is amplified by a very popular federal tax policy known as the mortgage interest deduction (MID). This policy first appeared in 1894, when all forms of interest, including mortgages, were deductible from federal income taxes. This was a time when homeownership rates were low, the 30-year mortgage was nonexistent, and families generally paid cash if they bought a home at all.
Over time the mortgage interest deduction grew in popularity, making it hard for policymakers to cut. When the housing market tanked in 2007, the extra incentive of the MID helped boost the number of people willing to buy rather than rent and quickened the pace of the housing recovery.
The MID has outlived its usefulness. Only homeowners who itemize their deductions can receive MID’s tax benefit. Under the proposed GOP tax plan, even fewer middle-class households will find it worthwhile to itemize.
This forms an unintended but impenetrable income divide between homeowners who take the MID and those who don’t. Households that make over $100,000 in annual income benefit the most, receiving 77 percent of the subsidies. Homeowners earning more than $200,000 receive over a third of the benefit.
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