Tax Break for Mortgage Debt Is Ready for the Wrecking Ball: View
Americans think differently about housing now: Developers have cut back on speculative projects and mortgage bankers view lending standards more soberly. Another important change in attitudes emerged this week when people were asked how they feel about giving up the ability to deduct mortgage interest from their personal income taxes.
Forty-nine percent of respondents in a Bloomberg National Poll said they were willing to abandon the mortgage tax break if it meant lower overall tax rates. Only 45 percent opposed the switch. That’s a sharp contrast with polling patterns of prior years, when the public showed 2-to-1 support for keeping the mortgage deduction. The Bloomberg poll of 1,000 adults conducted June 17-20 has a margin of error of plus or minus 3.1 percentage points.
This change in sentiment creates a rare opportunity to fix a tax-policy mistake that the American public and its political representatives have defended tirelessly. The case against the deduction is strong. It is costing the U.S. Treasury $104.5 billion this year. It showers most of its benefits on wealthy people in high tax brackets who were going to buy homes anyway, while offering too little for strivers in the lowest tax brackets.
Worst of all, this tax break makes taking on unsustainable levels of personal debt too attractive. It can goad people into buying homes they can’t afford. It also encourages them to keep borrowing against the real estate they have, creating shaky home equity loans. Instead of making homeownership more affordable, the mortgage deduction may create housing bubbles and, in some places, inflate home prices so new entrants are priced out of the market.
During the housing boom, none of these objections carried much weight. The chance to get rich by being a small-time housing speculator was too attractive. With the taxman’s implicit support, many people stretched to buy big houses that they expected to be rewarding long-term investments. More daring souls tried to get rich with repeated buying, selling and more borrowing.
As long as the housing market kept rising over the past two decades, periodic calls to rein in mortgage tax deductibility went nowhere. Polls showed there was little desire to shed the break, even among renters who didn’t benefit from it. After all, a booming housing market meant renters could aspire to be the home-flippers of tomorrow.
Now, however, taking on heavy mortgage debt is seen as a road to ruin, not riches. One of the Bloomberg poll’s most striking findings is that a narrow majority of people earning $50,000 to $99,000 a year favors ending the tax break. Traditionally, that section of the middle class has cherished the benefit. Now, the poll shows that only people earning $100,000 or more solidly defend the mortgage deduction.
Last year, the bipartisan fiscal commission led by Alan Simpson and Erskine Bowles proposed modest curbs in mortgage- interest deductibility, to be phased in over seven years, as a way of narrowing the budget deficit. That time frame seems ample. The U.S. can start by reducing the maximum amount of eligible mortgage debt to half the current $1 million. After that, full deductibility can yield to ever-smaller partial deductions.
Public jitters about losing a cherished benefit can be put to rest by lowering overall tax rates to offset the impact of the fading mortgage deduction. By using a five- to 10-year phase-in, the U.S. could gradually move toward a more equitable tax system without creating sudden upheaval in people’s finances.
The housing lobby claims that ending the mortgage deduction could send home prices skidding and make it harder to recover from the four-year housing crisis. Such alarmist talk shouldn’t block action forever. Britain dismantled its mortgage tax breaks gradually, over 30 years, and home prices did just fine. Germany erased its breaks more rapidly, without any deleterious consequences. Housing markets from Canada to Australia function without mortgage-interest deductibility.
Getting rid of the mortgage deduction is one of the most effective elements of any plan to lower overall tax rates or narrow the deficit. That process should begin in earnest. This is a rare opportunity to make the most of public willingness for change.
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