CHICAGO (MarketWatch) — The housing market isn’t often a talking point for the presidential candidates as they focus on broader economic themes and job creation.
But there has been some discussion of the future of the mortgage-interest deduction.
Fear not, if you’re someone who benefits from the deduction: Politically, it remains nearly impossible to get rid of the perk.
“Now is not a great time to do something like this,” said Roberton Williams, senior fellow at the Tax Policy Center, a joint venture of the Urban Institute and the Brookings Institution, made up of experts in tax, budget and social policy. “Many homeowners rely on the cost of the deduction,” he said, “and if you undo that, there are enough people who are close enough to not being able to cover their mortgages that they’d be in trouble.”
Plus, powerful groups including the National Association of Realtors and the National Association of Home Builders lobby heavily on behalf of the deduction. On its website, NAR calls the deduction “a remarkably effective tool that facilitates homeownership.”
So why does removal of the deduction even come up?
“Part of it is the fact that Romney has proposed half a tax plan. His tax plan says here is what we’re going to do with tax rates — we’re going to cut them a lot,” Williams said. “If you’re doing the boogeyman stuff, he’s coming after your mortgage-interest deduction. It’s hard to imagine he wouldn’t go after those because he needs so much revenue to make up for the tax rate.”
As you might suspect, Democrats are fine with having you think that Republican presidential candidate Mitt Romney would cut the mortgage interest deduction, Williams added.
That’s even though the Republicans inserted language in their platform about the deduction, saying they would preserve the mortgage-interest break in the event that Congress fails to accomplish wider tax reform.
Meanwhile, President Obama has made clear the deduction would be safe under his watch. “I refuse to ask middle-class families to give up their deductions for owning a home or raising their kids just to pay for another millionaire’s tax cut,” he said during his acceptance speech at the Democratic National Convention.
Just because the deduction probably won’t go away soon doesn’t mean it shouldn’t be tweaked, according to some.
The deduction’s roots go back to 1913, when taxpayers were able to deduct interest paid on any loan, said Anthony Randazzo, director of economic research for the Reason Foundation, which describes itself as a think tank with the goal of advancing values of choice, individual freedom and limited government. “In 1986, Reagan tax reforms got rid of a lot of that, but interest on a mortgage was allowed to stay in the tax code.”
But now, to fully justify the mortgage-interest deduction, it would be worthwhile to explicitly define what it aims to do.
If the goal is to help people with lower incomes, the deduction doesn’t really get the job done, Randazzo said.
“For those people who do itemize, you have to be earning at minimum $35,000 to get more than maybe an $8 a month benefit on your mortgage,” Randazzo said. “Even up to $75,000 a year, you are getting a $179 annual average savings from the mortgage-interest deduction. That’s less than $15 a month benefit.”
People who benefit the most from the deduction are between the ages of 25 and 35, and have household incomes of more than $250,000, according to Reason research. Younger homeowners tend to benefit more than older ones because their mortgages are newer, and a larger percentage of their payments are going toward the loan’s interest.
If the goal of the deduction is to entice people to buy homes, it also isn’t the best policy, Williams said. Economists haven’t been able to show it raises the rate of homeownership, even though real-estate agents often tout it as a benefit.
Even so, “if the deduction disappears, [home] values will go down,” Williams said. “People who currently own houses will take a hit. They will not be worth as much as they are today, there’s no way around it.”
The removal of the deduction would cause people to bid less money for the same home, since they wouldn’t be able to rely on the tax break, he added.
It likely would take more of a shift in attitudes about homeownership for the deduction to be eliminated, and that could be coming — especially if the proposed qualified residential mortgage proposal requires people to put 15% to 20% down to buy a home, Randazzo said.
Some would say it’s already starting to shift, given the recent growth in popularity of renting, he said. Yet for many, owning a home is still a large part of the American dream
Still, if the deduction goes away, it would likely be part of a much broader reform of the tax code, Randazzo said.
“The way [elimination of the deduction] is going to happen is part of a grand bargain,” Williams said. At that point, the deduction could be just “one of the things that falls by the wayside.”