The plan to eliminate the mortgage tax deduction was widely criticized, but the industry overreacted to the proposal. Turns out it's not that great for most of us.
President Obama's deficit commission came up short of votes to command quick action in Congress of a bipartisan plan that recommended eliminating or reducing long-standing credits, including the popular home mortgage interest deduction. This isn't much of a surprise. While lawmakers acknowledge that the nation faces an incredibly worrisome debt problem and that a dramatic slash in spending needs to happen, the plan was politically unpopular from the start.
Real estate and mortgage industry experts argued the elimination of the mortgage deduction would put more pressure on an already fragile housing market. That might be the case, but if we look deeper, many of their arguments are exaggerated. If anything, once the housing market gains some strength three or so years from now, slimming the deduction down some might actually not be such a bad thing and it could save the US government billions of dollars. Here are three reasons why:
It doesn't benefit the vast majority of American homeowners anyway.
Under the current program, taxpayers who itemize their deductions can deduct the interest on mortgages of up to $1 million for their primary and second homes, as well as on home equity loans of up to $100,000. This overwhelmingly benefits relatively wealthier households since they're more likely to itemize their tax deductions. Middle to lower income households tend to go with standard deductions.
The deficit commission's proposal recommended scaling the mortgage interest deduction to $500,000 from $1 million and limiting it to only primary residences and not second homes. The deficit commission also proposed eliminating the mortgage interest deduction and turning it into a 12% nonrefundable tax credit available to everyone – a pitch that some experts including Steve Ott, director the University of North Carolina at Charlotte's Center for Real Estate says could benefit more homeowners including lower to middle-income households.
"A credit is always a benefit but the deduction is only a benefit to the extent that you itemize," Ott says.
What's more, even though mortgage industry leaders say doing away with the deduction could make homeownership less appealing, Chris Mayer, real estate professor at Columbia University, says the program hasn't proven to encourage home buying. Since the deduction mostly benefits relatively wealthier households, they would own homes with or without the deduction.
Years from now, it's anyone's guess what could come next of the mortgage tax deduction. Efforts to change the structure have been under way before. A panel in 2005 appointed by then-President Bush proposed allowing homeowners to claim a mortgage interest credit of 15% on loans of up to $412,000. The proposal never really took off.
It doesn't help home prices much.
In a way, the timing of the panel's latest proposals was just bad. Because of the fragility of home prices and record foreclosures, the housing market is an incredibly touchy topic, and a very political one at that.
Nationally, home prices for the third quarter fell 1.5% from the same time last year and were down 2% from the previous three months, according to data released earlier this week by the S&P/Case-Shiller index. At least for now, doing away with the deduction or scaling it down would likely push home prices even lower, especially in areas along the East Coast where home prices are higher relative to the rest of the country, says Mayer of Columbia University's Graduate School of Business. This might help make homes relatively more affordable to a wider spectrum of potential buyers but it could also increase foreclosures since far too many homeowners already owe more on their mortgages than their properties are valued.
Mayer adds that while winding down the tax deduction would add further pressure to the soft housing market in the short-term, it wouldn't have much of an impact on prices in the long-run. Enacting legislation that would start phasing out the program three or so years from now could be an option.
It encourages borrowers to take on more debt.
At a time when consumption has trended down and debt-ridden American consumers are trying to save more and spend less, it's not such a bad idea to tack on policies that could get homeowners to take on a little less debt.
One aspect often overlooked in the deduction is that it actually encourages homeowners to take on more debt than they perhaps would have without the subsidy, Mayer says. Anyone who pays off their home debt doesn't benefit from it.
With many homes under water and unemployment still at nearly 10%, many homeowners can barely pay their existing mortgages. So it's hard not to wonder why the government should spend so much on a tax policy that could further weaken the American consumer, especially since the subsidy steers them toward spending more of their income on homes as opposed to other goods and services that just might help the broader economy.
Also on Fortune.com:
Corporate America shrugs off deficit plan
Deficit reduction pleas fall on deaf ears
"This overwhelmingly benefits relatively wealthier households since they're more likely to itemize their tax deductions. Middle to lower income households tend to go with standard deductions."
What are you smoking? My mortgage deduction is the only reason I can itemize. I make $65K/yr and have $21K worth of deductions. $14K of that is my mortgage interest. $65K/yr isn't what it used to be. It's definitely nowhere near upper-middle class.
This entire article was Agenda driven. The person that wrote this article is obviously someone that rents. I wish some of these authors would just state their current situation before spouting non-sense.
I can get the same tax benefit I would pay to the bank in interest by donating the same amount to charity and I would be doing good with the money!
If you own a home and do not itemize your taxes you are very poor at handling your finances and tax strategy.
The main reason to get rid of the deduction is that if favors home buyers over renters.
Get rid of the deduction and lower taxes correspondingly.
Then the market can determine whether people buy or rent.
If you take away my interest deduction then I pay $1500 more a year in taxes because my charity plus interest isn't more than the standard deduction if interest is taken out of the equation. For me this means I will be putting much more money into paying off my house. That means less money going into the economy. I'm not the only one who will race to pay off my mortgage, that means less spending and more unemployment. way to slow down the economy.Also no more donating cars for breast cancer research since I won't be itemizing. Good luck cancer research charities.
The article states that the deduction limit might be reduced...then in the next sentence it says the deduction might be eliminated and turned into a credit. If it is a credit then less people will itemize deductions. This is an ATTACK on charity and churches in disguise. I currently deduct $8000 in interest and $9,000 in charity giving for a total deduction of $17,000. If the interest is changed to a credit then I would only have $9,000 in total deductions, so it makes more sense to take the general deduction. So for everyone currently giving $10,000 or less in charity, they would be better off taking the standard deduction. THERE WILL BE MUCH LESS INCENTIVE TO GIVE TO CHARITY. Expect the giving to cancer research, churches, domestic abuse, etc to go WAY down as a result!
I'm really, really cynical, especially after watching the superwealthy get all of these sweetheart financing deals during the recession. What I suspect is going to happen with this proposal is the middle class is going to get short end of the deal while the superwealthy walk away with even more subsidies. This is just the latest attack in the War On The Middle Class the US Government seems to be fighting.
In principle, I think homeownership is for a bygone era when jobs lasted 30 years and people actually stayed in one place for an extended period. Today, it seems, jobs last a year or two, at most, then disappear in a corporate reorganization. The reality of today is that life is highly mobile; we should accept that fact and retool our housing inventory for mobility.
However, cutting this, right now, in the middle of a housing depression, is the ultimate example of a bad idea. Additionally, I'd like to see the superwealthy contribute one of their sacred cows before I'd even consider this. All we seem to see from the superwealthy is whining about how Obama is a "socialist".
The Middle Class has given enough in the laast 10 years. We don't have anymore to give and we have very little to lose.
The government ought to encourage home ownership. This small break for the majority of hard working middle class Americans is needed to help stabilize the housing market and communities.
It only takes a small peek back in time when the last mortgage breaks were ended. It wrecked the housing markets for decades and cost the taxpayers billions to bailout.
Jim R obviously either didn't read the article, or his reading comprehension skills are severely lacking....
Or worse yet, he did read it, and he can comprehend, to some degree. Yet he's another "short term thinker" only concerned about himself and a limited number of others.
BIG PICTURE Jim... BIG PICTURE...
Let's not try to fix the problem in the long run, because it may hurt some people in the short run.....
I've not seen such a poorly researched and invalid financial report on CNN in quite some time.
Unsourced "facts" about how few people actual itemize alone threw up the red flags. I've itemized every year since owning a home in my mid-20's. I'm far from rich (in America).
Why is it we are looking for ways to help the gov get more of OUR money when they should be looking for ways to quite spending OUR money. That or go to the flat tax.
The simplest solution is to eliminate ALL deductions. Everyone pays a percentage of their income, no exceptions. You could have one or two different levels for high income individuals, but no deductions. I can hear the tax accountants passing out and hitting the floor right about now!
Another corporate whore trying to get us to drink the Kool-Aide. The only reason to get rid of the mortgage interest deduction is to free up more money for more tax breaks for millionaires and billionaires. That's all this provision is about. You won't find tax increases for wealthy people in the Debt Commission's report because they're just gonna keep stickin' it to the middle class. Guess what? I pay 25% on half my money because I'm single with no kids (thus, I'm paying Republican families' taxes for them while they cry foul about "socialism" - who's the f'ing socialist now?). If they take away the mortgage interest deduction I'm walking away from my mortgage like the rest of the Republicans who caused this problem and are now collecting food stamps (yes, I actually know of real Republicans collecting food stamps who live in a $400K house they're not paying for).
quote "Middle to lower income households tend to go with standard deductions."
Those of us middle class folk who donate a tithe for charity tend to get to itemize. Problem solved.
These entitlement programs must end.
So you decided to borrow a huge amount of money to purchase a home? How does that preclude you from paying your fair share of taxes? Why are you special?
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