Are Mortgage Tax Breaks Breaking the U.S.?

Are Mortgage Tax Breaks Breaking the U.S.?

The latest Case-Shiller housing data suggests that housing markets have now stabilized. Prices were higher in February 2010 than they were in February 2009.

This stability makes it possible to move beyond stop-gap measures and to envision fundamental reforms that will make the next housing crisis less damaging. Some economists believe lowering the $1 million cap on the home mortgage interest deduction is a good place to start.

The deduction is an old policy that has remained a constant in good times and bad. Moreover, the bubble can’t be explained by low interest rates or easy mortgage approvals or high loan-to-value ratios.

The home mortgage interest deduction also subsidizes Americans to buy bigger homes, and there is little reason to like that. Americans, even poor Americans, have almost twice as much living space as the average resident of France or Germany.

There is a powerful connection between structure type and ownership, which means that encouraging homeownership implicitly encourages sprawl. More than 85 percent of people in single-family detached dwellings own; more than 85 percent of people in dwellings with more than five units rent.

The mortgage interest deduction is extremely regressive. Some economists estimate that the deduction typically saves $523 per year in taxes for home-owning families earning between $40,000 and $75,000, and $5,459 per year for families earning more than $250,000.

Now that prices have stabilized, some would like to see the home mortgage deduction phased out. The interest deduction currently has an upper limit of $1 million. That limit could be reduced by $100,000 per year over the next seven years, which would lead to a less regressive $300,000 cap. After that point, we could consider replacing the interest deduction altogether with a flat homeowner’s tax credit that would encourage homeownership without encouraging borrowing or big houses.

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