Is It Time to Kill the Mortgage Interest Tax Deduction?

With proposals from both President Obama and Republican leaders to broaden the tax base, it seems likely that some cherished income tax deductions may be reduced or even eliminated, and one leading candidate for the chopping block is the deduction for mortgage interest.

Though many economists argue the mortgage interest deduction doesn't work properly, most Americans don't agree. A poll by USA Today and Gallup published Friday showed that 61% of Americans oppose eliminating the mortgage interest tax deduction to either lower the overall tax rate or as a way to reduce the federal deficit. In fact, the poll showed that a majority of Americans were against eliminating any tax deductions.

But both the Obama deficit reduction plan and the plan put forward by U.S. Rep. Paul Ryan (R-Wisc.) would require some tax changes. "It's hard to imagine you could do a lot of base broadening while leaving the mortgage deduction completely untouched," says Alan D. Viard, a resident scholar at the American Enterprise Institute in Washington, D.C. "I think it is fair to say that each of them would end up having to do something with the mortgage deduction if they really wanted to carry through on what they are promising."

According to the Treasury Department, the budget for 2012 projects that the mortgage interest deduction will cost the budget around $100 billion. But Eric Toder, co-director of the Urban-Brookings Tax Policy Center in Washington, estimates that elimination of the deduction would only generate $70 billion to $80 billion, because some people would pay off their mortgages early if the law is changed.

"Most of the deduction is going to the people who are itemizing -- relatively high-income people who would be home owners anyway," Toder says. "People on the margin -- who might be thinking about renting or buying -- can't use the deduction."

AEI's Viard says the deduction actually "encourages people to own bigger homes or more expensive homes. It is hard to see the public purpose in that objective."

Who Gains the Most From the Deduction?
There is no dispute that the deduction benefits higher-income earners more than lower- and middle-income Americans. If you're in the 35% tax bracket, you get $35 of savings for every $100 of mortgage interest you pay, but if you're in the 15% tax bracket, you only get $15. So it's hard to claim that the deduction is targeted at people who are on the fence on the question of buying a home vs. renting.

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But a counter-argument comes from Robert Dietz, an economist with the National Association of Home Builders, who says that elimination of the mortgage deduction would have "a huge impact" on first-time home buyers.

In the early years of a 30-year, fixed-rate mortgage, Dietz notes, the largest part of each payment goes directly to interest -- only a little goes to paying down the loan's principal. As a result, he says, recent first-time buyers are the ones for whom interest makes up the largest share of the household budget, and it is they who would be hurt the most by an elimination of the mortgage interest deduction.

Dietz maintains that 70% of the benefits from the reduction in tax liability go to people earning between $50,000 and $200,000 a year. Eliminating the mortgage deduction "would have the effect of delaying the home ownership status of some people, as they would have to accumulate a larger down payment before they became home owners," he says.

Toder says he doubts that elimination of the deduction would divert potential homeowners into becoming renters. "I think what it would probably do is reduce the amount of money you would spend on a house," he says.

And, he notes, if there are no transition rules, current homeowners could get squeezed painfully if the deduction is eliminated while they have to carry on making the same old mortgage payments.

An Alternate Proposal

One plan that is gaining currency was suggested by President Obama's budget reform commission, which was headed by former Sen. Alan Simpson (R-Wyo.) and Erskine Bowles, former chief of staff to President Clinton.
They proposed to eliminate the mortgage interest deduction and replace it with a 12% credit for interest paid. While that would be less than many taxpayers now receive for the current credit, lower-income earners such as seniors would be entitled to claim the new credit even if they don't file for itemized deductions.

The current limit for the proposed deduction is mortgages on $1 million homes. Viard says by making interest credit available to people who don't itemize deductions and placing a limit on the dollar value of the house, it wouldn't encourage people to buy more expensive houses.

"This credit is much more focused on what may be the legitimate goal of encouraging home ownership instead of this clearly illegitimate goal, which I am not sure anybody has identified, of encouraging bigger houses," Viard says.

Or perhaps we can eliminate mortgage interest from consideration altogether. After all, Canada and Britain don't allow it as a tax deduction, and the real estate markets are booming in both countries.

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The amount of cash you can get depends on your age, the type of reverse mortgage you select, the appraised value of your home, current interest rates, and where you live. In general, the most cash goes to the oldest borrowers living in the homes of greatest value at a time when interest rates are low. On the other hand, the least cash generally goes to the youngest borrowers living in the homes of lowest value at a time when interest rates are high.

June 28 2013 at 4:11 PM Report abuse rate up rate down Reply
Dear MoonWolf

FUNNY how all those in congress keep yappin' away about OUR public benefits, yet, have ANY of them offered to forego all the benefits THEY'RE getting - both DURING and AFTER serving congress? Yet, they're looking all over the place to see how they can cut down the little guy. They're determined to turn the US into a third world country, all the while feeding the WAR PROFITEERS like HALLIBURTON and BLACKWATER and the rest of the War Monster. Dirtbags.

July 13 2011 at 12:44 PM Report abuse rate up rate down Reply

Awesome article.
This site also has info on mortgages

June 27 2011 at 5:57 PM Report abuse rate up rate down Reply
Keith Moore

Any rationale analysis of this deduction can only point to one conclusion: eliminate it. It doesn't work and instead promotes indebtedness, price inflation, market distortion, income inequality, and overuse of resources:

May 16 2011 at 12:41 PM Report abuse rate up rate down Reply

No more taxes and don't mess with the interest on the mortgages. Better yet, allow credit card debt to be written off as well. It is income for the Card companies. We pay tax on the money we make, we pay sales tax at the register and we pay interest on the card that we made the purchase with. Some may say use cash and you don't have to worry about the interest. If we did that then the credit card companies would go out of business and also don't see too many people with thirty thousand to buy a car straight out. Then you have some states that tax personal property as well. It is time to just stop all the taxing and chill for awhile. We have way to many people on the dole in America and that includes people paid with taxpayers dollars.

April 25 2011 at 8:12 PM Report abuse rate up rate down Reply
1 reply to dmwoodcock's comment

You aren't really dumb enough to buy a $30,000 car with a credit card. Are you?

April 25 2011 at 9:11 PM Report abuse rate up rate down Reply
1 reply to bggdg's comment

How did you make the correlation between a credit card and buying a car? I was referring to credit regardless if it was a card or paper I will take 1.5% on a card all day/.

April 26 2011 at 7:39 AM Report abuse rate up rate down
Hi Pat Payne!

Since everyone knows that most mortgages front-load the interest, why not compromise? Jjust have deductions allowed on the first 10 years of a 30 year mortgage and the first 5 of a 15 year mortgage. There will stil be some savings to the government particularly years 11-20 of a 30 year mortgage; and years 6-10 of a 15 year mortgage, but the home buyer will get the first third of the mortgage that may help them reach the point of gaining some equity.

April 25 2011 at 5:35 PM Report abuse rate up rate down Reply
Blessings Dottie

OMG wtf is next? are they going to confiscate all of our earnings and then hand us what THEY think we should have? We are being TAXED to death!

April 25 2011 at 8:17 AM Report abuse rate up rate down Reply

The Progressive Party of the early 1900's started all of this confusion. They were socialists but couldn't use the name "Socialist" at the time.

They started the Federal Reservie Baning system, which is privately owned, like a Corporation. And, they started the graduated Income Tax system, and this system is right out of the pages of Karl Marx's plan.

Their hardest goal to achieve, was to remove Christian Thought out of the American lifestyle...starting with the school systems...and other media systems.

April 25 2011 at 7:48 AM Report abuse rate up rate down Reply

Interest should not be charged in the first place. No credit or currency is placed into the economy for interest charges. It is biblically illegal.

April 25 2011 at 7:45 AM Report abuse rate up rate down Reply
1 reply to Gregory's comment

Biblically "illegal"? Laws are written by man.

April 25 2011 at 8:33 AM Report abuse rate up rate down Reply

thousands of loop holes all through our tax code, probally 99 % for high end people and business, and which one is the one they say they must close????? I remember some time back the talk was how we had to almost double congresses pay in order to keep the smartest and the brightest to work there. Maybe we could take soldiers from each state and temporarly , have them represent their state in wasington, House and senate. and fire all in congress right now, and start a new gov't, one that works for the people, and not to keep their pocket full. I do not think it would be hard to prove most in congress no longer work for the common good of the people, they represent , isn't that kind of unconstitutional?????

April 25 2011 at 7:02 AM Report abuse rate up rate down Reply