Editor: David Reiss
Brooklyn Law School

June 5, 2013

The Mortgage Interest Deduction: A Taxing Expenditure

By David Reiss

The Congressional Budget Office has issued a report, The Distribution of Major Tax Expenditures in the Individual Income Tax System,  which evaluates the mortgage interest deduction and the state and local tax deduction among other tax expenditures.  It finds (consistent with all previous findings) that they accrue disproportionately — grossly so — to the wealthy.  The mortgage interest deduction has a budgetary effect of $70 billion and the state and local tax deduction has a budgetary effect of $77 billion. (6, Table 1) (to be clear, budgetary effect is not the same as lost revenue; read the report for an explanation of the difference)

Itemized deductions such as these “provide the largest benefits — in both absolute dollars and relative to income — to the highest-income taxpayers.  Those tax expenditures benefit only the roughly one-third of taxpayers who itemize their deductions, and lower-income taxpayers are much less likely than higher-income taxpayers to do so.” (17)  The CBO “estimates that the top quintile will receive almost three-quarters of the benefit of the deduction in 2013, including 15 percent accruing to the top percentile.” (18)

I and many, many others have argued that this is not a good state of affairs but the real estate industry are very well organized around this issue.  Real estate brokers are particularly focused on this because a reduction in these deductions would likely lead to a significant and permanent reduction in their income.  Smaller deductions would make owning a home less financially attractive and thereby push down prices.  Brokers typically get paid by a percentage commission of the sales price.  So they would suffer not just during a transition period (as sellers in the transition period would) but for all time.

So there is no reason to believe that we will see reform around these regressive tax expenditures in the near future, but it should always be kept on the table as part of a tax reform package, particularly if it is implemented in some incremental way (for example, capping the value of the deductions individually or as part of a basket of deductions).

| Permalink