D.C. Suburbs Have Most Concentrated Mortgage Tax Breaks

The mortgage interest deduction capital of the U.S. lies just outside the nation’s capital.

More than two of every five tax filers in the Washington area’s Maryland suburbs of Bethesda-Gaithersburg-Frederick claim the tax break, the highest percentage in the country, according to a report by the Pew Charitable Trusts.

“The distribution of this tax benefit is uneven across the states for many different reasons,” said Anne Stauffer, director of Pew’s fiscal federalism initiative. “There are these large variations, which mean that the impacts of any change would actually be very different” across the U.S.

The mortgage interest deduction, long considered politically untouchable in Congress, is being scrutinized as lawmakers debate whether and how to curtail it as part of a rewrite of the tax code that would lower marginal rates. Changing the deduction could affect real estate agents and home builders, along with the appliance and furniture industries.

Previous studies have demonstrated that the tax break, which is available only to the one-third of taxpayers who itemize their deductions, tends to benefit higher-income households.

More than three-quarters of the $68 billion benefit in 2012 was claimed by households with annual incomes exceeding $100,000, according to the congressional Joint Committee on Taxation.

High Income

The tax break tends to be concentrated in high-income areas with relatively high property values and homeownership rates. The Pew report shows the geographic disparities inherent in the deduction.

Economists and bipartisan groups have suggested ideas for curbing the deduction without eliminating it. Those include lowering the $1 million cap on the amount of a loan that can be deducted and preventing owners from claiming the tax break for second homes.

“The key is really to focus the tax benefits more carefully,” Phillip Swagel, a public policy professor at the University of Maryland who served in the Treasury Department during George W. Bush’s presidency, told a House Ways and Means Committee hearing last week.

The Washington region, filled with government workers and contractors, is one of the wealthiest in the country.

Seven of the 10 counties with the highest median U.S. income in 2011 surrounded Washington, according to the Census Bureau. Census data also show that 14.1 percent of the region’s households were in the nation’s top 5 percent, ranking third among metropolitan areas.

Regional Rankings

The rest of the Washington metropolitan area, which Pew researchers analyzed separately from the Bethesda-Gaithersburg-Frederick region, ranks fourth in the mortgage interest study, after the Minneapolis region and then suburbs in Illinois and Wisconsin between Chicago and Milwaukee.

When ranked by the average size of the mortgage interest deduction claimed on tax returns, the Bethesda area comes in fifth, at $6,775. Topping the list are four regions in California, led by San Jose-Sunnyvale-Santa Clara, where the average tax filer deducted $7,659 in mortgage interest.

The metropolitan data are from 2007, the most recent available from the Internal Revenue Service, according to the study by Pew, a non-profit group that does research in areas such as environmental and health policy.

State-level data from 2010 put Maryland first and Virginia third, both in the percentage of filers claiming the tax benefit and the average size of the break.

North Dakota residents had the lowest average mortgage interest deduction, at $1,192, which was 26 percent of the average $4,580 in Maryland.

Just 15 percent of West Virginia residents deducted mortgage interest in 2010, less than half the rate in neighboring Maryland.

Maryland in 2011 had the country’s highest median income at $70,004, 39 percent above the national average.

Before it's here, it's on the Bloomberg Terminal.